How Low Can They Go?

Subscribers to my Safe Money Report already know that I nailed it in last month’s cover story on interest rates.

I went against the crowd and I predicted that intermediate- and long-term interest rates would fall – even as Janet Yellen and her band of merry men tried to push up the short end of the yield curve by raising the discount rate.

And if you are a regular reader of my weekly Money and Markets column, you know that as a money-making Wall Street professional, I’m obsessed with watching the yield on the 10-year U.S. Treasury. That’s because this top-of-the-food-chain interest rate is the key signal for pricing assets across the board.

Yes, the yield on the benchmark U.S. Treasury sets the prices that investors are willing to pay for everything, ranging from bonds to stocks to commodities to real estate …  it even impacts how much my super-wealthy clients are willing to pay for private-equity investments.

That’s why —  at the beginning of the year —  I let you in on the one simple secret for forecasting the direction of the stock market in 2017: The yield on the 10-year U.S. Treasury.

Smart investors should prepare for interest rates to keep sliding lower, despite what TV pundits say.

And that’s why, in my Money and Markets article last week, “Keep It Simple To Rake in Gains”, I called your attention to competing yields on other sovereign government bonds like the German Bund … so, together, we would get an accurate read on where the 10-year rate was headed as we end the first quarter of 2017.

And you know what? I was right.

Except for a brief blip, U.S. interest rates have trended down over this past week and the stock market has tagged along in a similar decline just as I said they would.

What’s more, the longer-term 30-year U.S. Treasury actually dipped below the magical 3%-yield threshold for a brief moment this past week.

So now what?

Well, since I am so infatuated with the yield on the 10-year U.S. Treasury (and if you like to make money, I encourage you to become just as obsessed), I am going to give you one more reason why this key rate is headed lower.

And it’s a valuable insight that you won’t get from the mainstream media.

As I pointed out in a chart that I presented two weeks ago, the Fed was the first central bank to halt QE. But as the Fed tapered QE, the European Central Bank ramped up its QE in an attempt to inject life into a moribund Eurozone economy.

As QE in Europe intensified and as their interest rates went lower, international demand for U.S. debt — where yields were higher for bonds of equivalent maturities —  naturally increased.

In fact, the gap in the yield between U.S. Treasuries and the German Bunds reached its widest spread since 1989. Meanwhile the spread between U.K. gilt yields increased to its widest in history. This large differential —  between yields on foreign government debt and U.S. government debt – gave foreign investors a huge incentive to buy U.S. Treasuries.

But that’s all about to change in a big way.

Here’s a chart from a recent article in the Financial Times that shows that foreign purchases of U.S. Treasuries are beginning to tail off.

Indeed, the Financial Times reports that China’s central bank has begun to sell off its inventory of more than $1 trillion in U.S. Treasury bonds. And Japan, the biggest holder of U.S. Treasuries, has also been selling down their holdings.

Why?

It’s because foreign central banks worry that U.S. bonds have become too expensive when compared with other alternatives. So they think they had better sell now and diversify their holdings.

What’s all this mean?

All in all, it’s just another brick in the wall signaling lower interest rates in the U.S. And for now, lower U.S. interest rates mean a continuing short-term pullback in the U.S.

What should an investor do?

The plan remains the same as I’ve outlined in previous Money and Markets articles: A core portfolio of high-quality growth stocks hedged with an overlay of the ETFs GLD and TLT. For the specifics, including buy, sell and hold recommendations and the appropriate percentage allocations, subscribe to my Safe Money Report.

And keep an eye out for next week’s article, where I’ll reveal the ticking time bomb across the Atlantic that currently poses the biggest threat to your wealth. And I’ll explain why it could lead to another global credit crisis greater than the one we experienced in 2009 – if it’s not disarmed soon.

Best wishes,

Bill Hall

P.S. My primary mission in Safe Money Report is to provide you with the 100% independent research and analysis you need to help preserve — and grow — your wealth in both rising and falling markets. Read more here …

Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.