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How to Rent a Fortune

With a 37% gain in The Blackstone Group LP (NYSE: BX) since late July, we’ve done really well with our targeted investment in real estate.

And with very quick gains of 9% in Brazilian-food processor BRF SA (NYSE ADR: BRFS), 5.2% in South American agricultural play Adecoagro SA (NYSE: AGRO) and 1.6% in high-tech agribusiness player  Neogen Corp. (NasdaqGS: NEOG), we’re doing well with our plays on (pockets of) accelerating U.S. inflation.

Today we’re going to combine the two concepts and employ a very simple formula we believe will add to your profits…

  • Featured Story

    The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)

    I've made no secret of my aversion to Treasury bonds. Yields right now are irrationally low, and thus do not accurately reflect U.S. credit risk.

    And since inflation is already running higher than bond yields - and is likely to rise even further - Treasuries offer an inadequate return at best, and at worst, a capital loss if sold before maturity.

    Even Treasury Inflation Protected Securities (TIPS) aren't as safe as you might think.

    Fortunately, the U.S. Treasury is finally thinking about issuing something useful: Floating rate notes (FRNs).

    If the Treasury does end up issuing FRNs, and the pricing is reasonable (and the U.S. Treasury still has a credit rating better than junk bonds), then you should seriously consider buying some.

    Don't Trust TIPs

    Floating rate debt issues are not that common here, but there have been many in Europe. They were even more common in my early banking days in the 1970s - when interest rates were generally rising.

    FRNs have one great advantage over fixed-coupon bonds: If interest rates go up, fixed-coupon bonds go down, sometimes by a lot if the bonds have a long time to maturity.

    For example, if 30-year interest rates rise from 4% to 5%, the trading price of a 30-year bond ($100 face value) will drop to $84.48. If you were to sell at that point, you'd lose 15% of your principal - the equivalent of nearly four full years worth of interest.

    However, a floating rate note on a good credit rating should always trade near par. If short-term interest rates go up from 1% to 5%, the note will pay 5% in the next interest period, so it will still trade close to par. That means you have principal protection as well as interest rate protection.

    Theoretically, TIPS should offer similar protection. And they do if interest rates always stay at the same margin above inflation. But in periods like the present, interest rates trade below inflation, so the price of TIPS gets bid up above par.

    Today, 10-year TIPS yield only 0.19% and 30-year TIPS yield only 1.00%. Since real bond yields in normal markets should be in the 2% to 3% range, there is potential for the loss of principal here. Indeed, in real terms there is a certainty of loss of principal - the "on-the-run" 30-year TIPS trade at a price above $128, so over the next 30 years you are bound to turn $128 into $100 in real terms - not a good deal.

    Sidestepping Uncle Sam

    Additionally, there is another problem with TIPS: The government sets the price index to which TIPS are linked. And if you think the government is too honest to fudge the price statistics to make its debt cheaper, I have some sad, disillusioning news for you.

    To continue reading, please click here...

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