This method of measuring risk on high-yield bonds isn't just wrong - it ensures investors a bad outcome.
- Why Investors Are Buying Negative-Yield Bonds
- This Looks Like the Setup for a Bond Bloodbath
- Rich or Poor, You Can’t Ignore U.S. Treasuries in Today’s Markets
- This High-Tech Leader Could Double Your Money by Disrupting the $40 Trillion Bond Market
- How to Get Aggressive and Profit from the Junk Bond Market Crash
- The Only Way Bond Yields Will "Go Up" Now
- Bond-Buying Chaos Is Spinning Out of Control
- Why the Federal Reserve Will Move Rates
- What Are High-Yield Stocks?
- Argentina Stock Market Crash Reverses After Today's Deal - for Now
- Money Morning Exclusive: Meredith Whitney on Muni Bonds and Red State-Blue State Migration
- What Bankrupt Athletes Wish They Knew About Financial Windfalls
- Beat Ben Bernanke with These Juicy Double-Digit Yields
- The Five Questions You Need to Ask Your Financial Advisor Right Now
- No Bull: Could the 10-Year Note Hit 1%?
- Investors Turn to TIPS as Warren Buffett Warns on Inflation
Negative-yield bonds are the next crazy result in a global economy turned upside-down by central banks.
More than $12 trillion of global debt is now in negative-yielding territory - a move directly at odds with the argument that the global economy is healthy.
The same is true of the drop in U.S. Treasury yields. Real per capita GDP has risen by a mere 1.3% annualized since 2009. Is it any wonder that yields have plunged and the Treasury curve is flattening?
While I expect the market to recognize the truth about inflation sooner or later, there is every possibility that yields will move lower before they move higher due to tepid growth and a flight to safety in the event of a sharp market sell-off (as we saw after Brexit).
Analyst Christopher Wood, I think, said it best: "[T]he fact remains that the intensifying global move into negative bond yields this year is plain scary...But what is also scary about the gathering lurch into negative territory...is that it is the sort of parabolic move or 'spike' which to technical analysts often signals the approaching end of a long trend."
A little more than a year ago, we saw a sharp reversal in German 10-year bund yields when they dropped to around 10 basis points and then spiked to around 1%, leaving traders nursing sharp losses. Post-Brexit, 10-year bunds are trading at negative yields, pushed lower by flight-to-safety buying and expectations that the European Central Bank will continue to monetize the economically moribund region's debt.
This looks like the setup for a bond bloodbath.
There are a good number of investors who believe that U.S. Treasuries - notes in particular - are bad for you and even worse for your money at the moment.
Why really doesn't matter... rates might rise, deflation, a bond market bubble, there's too much debt... they're riskier than you think, goes the argument.
All of those things are, well... true. Yet, I submit U.S. Treasuries are the one investment you cannot afford to be without at the moment for three reasons.
Despite playing such an indispensable role in the modern economy, the bond market is woefully out of date in how it operates.
In fact, the bond market doesn't even make use of electronic exchanges. That's one reason why that $40 trillion market is ripe for disruption. And where you find disruption... you find opportunities for fast profits.
You've just got to love the junk bond market. It's sent stocks on a nice year-end rally for us, and the profits have been sweet.
But don't fall in love with those stocks at these highs. The "help" they're getting from high-yield debt isn't going to last.
In fact, I believe the lull in the junk bond market is going to end in the first quarter of 2016. And I think the ugly sell-off will resume, and that storm is going to take stocks all the way back to their August 2015 lows - and possibly a lot lower.
A lot of people could lose big - well into the double digits - but I'm not worried at all. And when you see the perfect trade I'm about to show you, you'll be ready for the sell-off, too.
Last week, the Fed chose to not raise interest rates. That decision will continue to render traditional bond investments unattractive, holding them to extremely low yields.
Just looking at the returns being generated by the largest bond funds shows you'll go hungry depending on bonds for income and total returns.
A few weeks ago, the man formerly known as the Bond King, Bill Gross, tweeted that shorting German bunds would be the trade of the century.
I was gratified to see that he was reading my mind, as readers of my Credit Strategist newsletter already know.
As a result of a massive bond-buying program by the European Central Bank (ECB), the yields not only on German bunds but on all European debt had plunged to ridiculously low levels.
To say that markets are confused about when the Federal Reserve is going to raise interest rates is the understatement of the year.
The confusion is understandable. While the U.S. economy no longer needs crisis-era policies like zero interest rates and quantitative easing, the rest of the world is still struggling.
While some would argue that such policies are not the answer, central banks in Europe, Japan and China are doubling down on huge bond buying programs.
With interest rates at an all-time low, high-yield stocks have replaced bonds as the best option to provide a stream of income in a portfolio. What's more, they deliver the added perk of equity ownership for potential growth.
Monday, a stock market crash to the tune of a 12.22% drop hit the Merval Argentina (BCBA: IAR), the most important index of the Buenos Aires Stock Exchange. The index fell to 5,847.78 by market close on Monday – 15% from its all-time high hit just six days prior.
But today, Argentina’s stock market got relief. Stocks are up 1.14% after the country’s lawyer said it will negotiate with a group of hedge funds that are suing over $1.33 billion in bonds.
In 2010 Meredith Whitney made an earth shattering statement during a CBS's "60 Minutes" interview that rocked the municipal bond investment world.
"There is not a doubt in my mind that you will see a spate of municipal-bond defaults,"said Meredith Whitney on Dec 19. She continued, "You could see 50 sizable defaults, and 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars' worth of defaults."
The muni bond market fell far short of Whitney's prediction. But many today feel she was merely ahead of her time.
Recently Detroit has defaulted on its muni bonds leaving investors hoping to get 10% return on their original investment, but there are no guarantees.
As Detroit moves closer to bankruptcy California has 10 cities facing the same fate. The cities of Atwater, Azusa, Compton, Fresno, Hercules, Mammoth Lakes, Monrovia, Oakland, San Jose and Vernon are ready to file for bankruptcy following the now bankrupt Stockton's lead.
Money Morning's Shah Gilani recently talked to Whitney in an exclusive interview about her new book, The Fate Of The States:
The new Geography of American Prosperity
She believes that wealth and opportunity are moving away from the coasts and toward the central corridor. The states of California, Florida and Nevada benefited from the housing boom. However instead of budgeting wisely, local governments spent their windfall profits as fast as they came in on pay increases for public employees, pension increases and pay hikes.
When the housing boom ended, the money stream became just a trickle of new capital. The states were left with pensions they couldn't pay and employees they couldn't afford. They were forced to raise taxes for schools and essential public services.
In contrast a much different scenario was developing in the interior states: N. Dakota, Texas, Indiana. These states avoided the housing crisis. Because foreclosure was not a serious problem they found themselves rich in capital with money to offer tax incentives to companies to relocate and retrain new employees.
These central states are also positioned to reap the massive benefits of from the oil and natural gas boom.
Few among us haven't dreamed of sudden riches - the financial windfall of a big legal settlement, an unexpected inheritance, a winning lottery ticket, or, for the young and athletically gifted, a lucrative contract with a major professional sports franchise.
But it turns out that few are prepared for a financial windfall when it comes their way.
Nowhere is this more obvious than with big sports stars.
Despite the proliferation of multimillion-dollar contracts, an astonishing number of professional athletes are forced to declare bankruptcy within a few years of hanging up their jerseys.
In the National Football League, for example, where the average salary is $1.9 million, 78% of former players are in bankruptcy within five years of retirement. That figure is 60% for former National Basketball Association players, who earn an average of $5.5 million a year as players.
How can people so generously compensated go broke so quickly?
Part of it has to do with youth, but many of the mistakes athletes make with the financial windfall of a professional sports salary also are made by regular people who suddenly come into large sums of money.
There's a lot we all can learn from their mistakes. When it comes to financial windfalls, it's best to know what to expect ahead of time so you can put the money to work for you instead of squandering it.
"Every single day, people come into large sums of money, whether it's a thousand dollars or a million, and without proper planning, funds quickly disappear," writes Jim Wang in U.S. News and World Report. "Just look at the horrible stories you often hear of lottery winners, and you'll have enough evidence that everyone needs a little preparation, even if you don't expect to get a windfall."
With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.
From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.
That's everybody who isn't a gazillionaire. You may know a few people who fit this bill.
Being a 99-percenter just means that you want to do better.
In that regard, you're no different than the 1%. They just have more money and by extension more freedom than you.
That doesn't mean they are any smarter.
I know plenty of uber-rich people who are financially inept. You probably do, too.
What sets people apart sometimes, though, is as simple as the questions they ask. True 1-percenters have this down pat-even if they don't have a gazillion dollars.
Here are five things you need to ask your financial advisor today if you want to join them.
If you do, you'll profit more consistently, reduce your risk and invest with greater peace of mind.
And I have no doubt that you will join the real 1%.