At Weiss Research, we take pride in the fact we warned of the epic destruction well in ADVANCE of the twin busts in tech stocks and housing.
Martin and his colleagues coined the term “dot-bombs” way back when. And I urged investors to dump every last real estate investment they owned long before home prices crashed.
Now, a NEW massive bubble is starting to burst. Now, a grave new threat is staring you in the face. And now, I believe those who ignore our warnings will once again be sorry. That bubble? The Treasury bond market!
This is no small backwoods corner of the financial world. Quite the contrary, the bond market is enormous. As of year-end 2009, there were $34.7 trillion of U.S. government, corporate, municipal, and other bonds outstanding. By comparison, the entire market capitalization of the broad Wilshire 5000 Total Market Index for stocks is just $13.9 trillion.
Translation: The U.S. bond market is two-and-a-half-times the size of the U.S. stock market! Among the categories of bonds outstanding, the U.S. has $2.8 trillion of municipal securities and $2.4 trillion of bonds backed by credit cards, auto loans and similar assets.
But the biggest sector of the bond market is, by far, U.S. Treasury securities. Marketable Treasury bills, notes, and bonds outstanding (which excludes those held in certain government trust funds and accounts, as well as those at the Federal Reserve) totaled $7.6 trillion in mid-2009. That has more than doubled in just seven years, as you can see here ...
The Treasury Department and Federal Reserve are driving us inexorably in that direction with every inflation-fueling promise of free money ... every budget-busting bailout ... and every multi-billion dollar bond auction. Our foreign creditors are growing more disgusted, and the day of reckoning is rapidly approaching.
Investors Pouring Into Bonds that Are Anything BUT Safe!
I just established how huge the bond market is. Now, here’s the shocking truth you AREN’T hearing on CNBC or reading about in the Wall Street Journal: Investors are more exposed to a bond market crash and interest-rate explosion now than at virtually any time in recorded history! I say that because investors are dog-piling into bonds like never before.Just take a look at the chart I’ve included here. You can see that starting in late 2008, bond funds began to pull ahead of stock funds in popularity — and not by a small margin.
In February 2009, for instance, bond funds took in a net $16.8 billion. Stock funds actually lost $24.9 billion in investor cash.
In August 2009, bond fund inflows swamped stock fund inflows by a ratio of almost 11 to 1 — $43 billion vs. $4 billion.
Then in September 2009, bond funds took in a whopping $47.7 billion in investor money. Stock funds? They saw net outflows of $10.2 billion.
If this were occurring during a period where the stock market was collapsing, it’d be understandable. After all, investors frequently “fly to quality” when panic sets in, dumping stocks and loading up on Treasuries.
But these dismal stock flow figures came at a time where the market was climbing. Surging, even.
The story is the same with Exchange Traded Funds (ETFs) that buy strictly bonds. Their assets surged 87 percent year-over-year in December, while the assets of ETFs that buy domestic stocks rose only 28 percent. That’s been happening week in and week out, month in and month out.
But the cold, hard truth is that bonds can sometimes plunge in value just as much as stocks. And that’s not just true for high-yield, or “junk,” bonds. It’s also the case with medium- and long-term Treasuries! Consider these three historical examples:
- Between June 1979 and February 1980, the price of 30-year Treasury bonds fell from about 92 to 62. That’s a decline of almost 30 points. In other words, long-term Treasuries lost almost one-third of their value in just eight months! Bond yields, which always rise when bond prices fall, shot up from 8.9 percent to 12.6 percent.
- Or consider the bond market collapse from September 1993 to November 1994. Bonds tanked from around 122 to 96. Total loss? More than 21 percent in just over a year. Rates surged from 5.9 percent to 8.13 percent.
- And if you think all that’s ancient history, look at the price collapse that began much more recently. Treasury bonds plunged 30 points between December 2008 and June 2009. Interest rates almost DOUBLED — from 2.5 percent to 4.8 percent. And those declines could be child’s play compared to the bond market plunge I see coming very soon.
The Threat Is Here; The Time to Act Is Now
That leaves you with two choices:1) You can ignore the warning signs just as they are doing in Washington. You can assume our nation’s credit card will never be declined. You can just go on hoping for the best, while NOT preparing for the worst.
2) Or you can act now, with diligence and foresight, to avoid this disaster in the making. You can build a protective wall around your portfolio. And you can go on the offense, turning this looming disaster into one of the greatest profit opportunities of a generation.
My opinion? If you’re not paying attention to this new phase of the debt crisis, you’re making a grave error. And if you’re not taking swift action to protect yourself, you’re taking your financial life in your hands.
In this report, I will not only show you why the Great Interest Rate Explosion of 2010-2011 is going to get worse, why the Federal Reserve is powerless to stop it, and how it will impact investors and the capital markets overall but ...
I will also show you what you can do right now — TODAY — to protect yourself and your family from the inevitable fallout. Best of all, I’ll tell you how to turn lemons into lemonade using my powerful, three-pronged profit strategy.
But first, let’s talk about why the bond market is on the verge of an epic crash.
Bond Crash Catalyst #1 — Out-of-Control Deficits: The federal deficit for fiscal year 2009 came in at a whopping $1.4 trillion. The Congressional Budget Office recently projected that the 2010 deficit would essentially hold steady at $1.35 trillion (9.2 percent of GDP).
That massive 2010 deficit would be followed by another $980 billion deficit in 2011 ... $650 billion in 2012 ... and $539 billion in 2013. Total red ink through 2020: $7,400,000,000,000!
And president Obama’s numbers look even worse! His administration recently forecast a whopping $1.6 trillion deficit in 2010 — more than $200 billion above and beyond the CBO’s numbers.
And remember: Washington’s deficit projections often prove to be too optimistic. Two years ago, the CBO forecast the 2010 deficit would be $241 billion. Now the CBO has thrown that projection out the window and said it’ll be more than FIVE AND A HALF TIMES AS BIG!
Indeed, the Social Security system is on track to pay out more than it takes in THIS year. In other words, benefit outlays will exceed payroll tax inflows in 2010. That previously wasn’t expected to happen until 2016 — or later! The New York Times calls this “the first step of a long, slow march to insolvency.”
Bond Crash Catalyst #2 — Treasury Supply Is Exploding: Clearly, Uncle Sam is writing checks he can’t cover and making promises he can’t honor. He’s running deficits year after year, and the rate at which those deficits are accumulating is on an accelerating upward curve. So how’s he paying for it all? By issuing debt ... the most debt in the history of civilization! Just consider ...
- Net issuance (new debt sold minus old debt that matured) of government debt hit a stunning $922 billion in 2008. It then surged to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year!
- Just five short years ago, benchmark government sales of notes and bonds would total around $20 billion to $30 billion. That has now ballooned to more than $120 billion!
- Remember, that’s only longer term notes and bonds I’m talking about. Throw short-term T-bills (those that mature in less than one year) into the mix, and we’re seeing some weeks with MORE THAN $200 BILLION IN FRESH DEBT ISSUANCE! In one week in February 2010, the Treasury sold an average of $375,330.69 in debt a second!
- The total U.S. debt load is now on track to roughly double — from around $9.3 trillion in 2010 to $18.6 trillion by 2020!
We used to sell as little as $18 billion of 2-year notes a month. Now we’re selling $44 billion.
We used to sell just $13 billion of 5-year notes. Now we’re selling $42 billion.
We used to sell only $8 billion of 10-year notes. And those sales weren’t even held every month, which accounts for the gaps in the chart. Now we’re selling ten-year debt every month — more than $20 billion at a time!
Finally, we weren’t even selling ANY 30-year bonds for a while because we didn’t have to. But periodic sales resumed in 2006 — and now we’re dumping as much as $16 billion a month of these turkeys on Wall Street’s doorstep!
First, Treasury tried to sell $25 billion in 10-year notes. But investors failed to step up to the plate — a bright red warning sign for bonds if I’ve ever seen one!
With the 10-year auction, only 33.2 percent of the notes sold went to so-called “indirect bidders,” a group that includes key debt buyers like foreign central banks. That indirect share was well below the 39.3 percent average for the last ten auctions, a sign that foreign buyers are no longer buying aggressively.
Not only that, but the auction’s bid-to-cover ratio fell to 2.67 from 3 at the last sale. This indicator measures the dollar volume of bids against the dollar volume of Treasuries being sold. The lower the number, the less aggressive bidders are.
Finally, the Treasury had to sell the notes at a yield of 3.692 percent. That was higher than the 3.68 percent investors were expecting. Translation: Uncle Sam had to pay up to get buyers to open their wallets!
Second, the Treasury tried to sell $16 billion in 30-year bonds. But investors weren’t in a buying mood. The Treasury had to pay a yield of 4.72 percent, more than the 4.687 percent estimate of analysts.
The bid-to-cover ratio was just 2.36, compared with an average over the last 10 auctions of 2.48. And indirect bidders took down just 28.5 percent of the bonds sold, compared to a 10-auction average of 43.2 percent.
These are not one-off instances, either. Month in and month out, we’re seeing weak demand at long-term debt auctions.
Crash Catalyst #4 — We’re Also Starting to See Outright SELLING of Our Debt by Foreigners: That’s serious — because foreign creditors own roughly 60 percent of all our marketable debt outstanding.
Case in point: China. The largest foreign holder of our debt amassed more than $900 billion worth of our Treasuries by mid-2009. But it dumped a net $34.2 billion in December — the most in any month since the government started tracking in 2000! Then it sold almost $6 billion more in January.
Their message to Uncle Sam is loud and clear: Get your financial house in order, or else! And unfortunately, Washington isn’t listening! This all but ensures ...
Crash Catalyst #5 — A Sovereign Debt Crisis: In late 2009 and early 2010, a sovereign risk crisis struck Europe. The euro currency plunged, while yields surged on government bonds issued by the so-called “PIIGS” countries — Portugal, Ireland, Italy, Greece, and Spain.
The common cause of the sell-offs in these countries: Massive debts, massive deficits, and no realistic plan to deal with them.
How serious is this sovereign debt crisis? Deadly serious! Look at this chart, which tracks the cost of buying insurance against future default by the various PIIGS countries on their bonds. It has literally exploded higher from the levels we saw as recently as 2008.
Just look at the table I’ve included here. It shows the projected debt-to-GDP ratios and projected budget deficit-to-GDP ratios for the PIIGS countries, the U.K., and the U.S. The key conclusion: The U.S. is NOT the least vulnerable. Quite the contrary, other than its shaky status as the world’s dominant economic power, it is among the most vulnerable — with the third-worst debt-to-GDP ratio and the fourth-worst deficit-to-GDP ratio in 2010.
| Projected Outstanding Debt-to-GDP Ratio for 2010 | Projected Budget Deficit-to-GDP Ratio for 2010 | |
| U.S. | 94.27% | 10.64% |
| U.K. | 72.70% | 14.00% |
| Portugal | 85.40% | 8.30% |
| Ireland | 12.00% | 14.70% |
| Italy | 117.00% | 5.00% |
| Greece | 124.90% | 12.20% |
| Spain | 59.20% | 10.10% |
How High Might Long-Term Interest Rates Go?
I don’t expect an exact replay of the disastrous bond bear market in the early 1980s. But I can’t rule it out, either. I foresee three possible scenarios, all of which are bad for bondholders ...SCENARIO #1: If interest rates simply return to pre-crisis levels (circa 2001), I calculate that the yield of the current 30-year Treasury bond could rise to the 5 2/3-6 percent range. Assuming 5.86 percent, that would mean a price decline of 16.7 percent from today’s levels.
What might provoke this kind of move? The forces outlined above. But I don’t believe we’ll stop there ...
SCENARIO #2: In a more likely scenario, I see bond yields breaking through a key resistance level at 4.81 percent and surging to a target range of roughly 7¼-7½ percent. Assuming 7.36 percent for 30-year T-bond yields, we’d see a bond price decline of about 32.3 percent.
The same forces above would help launch this kind of move. Then it would gather steam as large foreign bondholders like Japan and China joined in the selling. Add in a major rise in U.S. sovereign debt fears, and it’d be a recipe for disaster.
SCENARIO #3: This scenario is possible but would require one more major element that I am not assuming in Scenarios #1 and #2 — the return of double-digit inflation. I am not counting on this additional boost to interest rates and nor should you.
But if it happens, there’s virtually no limit to how high interest rates could soar. With CPI inflation of, say 12 percent or more, the price of the 30-year Treasury bond could be decimated, sending its yield soaring to 14 percent or even 15 percent.
Many investors just assume that if Treasury yields rise, the Fed can counteract that. They think the Fed is all-powerful. And indeed, the Fed has tried all it can to hold long-term rates down.
As part of a massive attempt to boost Treasury prices launched in March 2009, the Fed purchased $300 billion in government notes and bonds. But despite all the Fed’s buying, bond prices have continued to fall and interest rates have continued to rise.
Plus, in an even larger effort to support mortgage bond prices — and to suppress mortgage rates — the Fed poured a whopping $1.25 trillion into direct purchases of mortgage-backed securities (MBS). It also bought $175 billion of debt securities sold by Fannie Mae and Freddie Mac. But again, even after spending hundreds and hundreds of billions of dollars, mortgage bond prices are still falling and rates are still climbing.
Clearly, the Fed has failed to stop this new phase of the debt crisis, and one of the key reasons is obvious: To buy bonds, the Fed must print money. But the more it prints, the more it fans inflation fears and the more it chases away bond investors, who realize they’ll be paid back in cheaper dollars.
In other words, it’s a massive Catch 22. If the Fed buys fewer bonds — or sells the bonds it has already purchased — rates will go up as supply overwhelms natural buyers. If the Fed buys more bonds, fear of the resulting inflation and perceived damage to the U.S. government’s credit will rise and rates will go up anyway. The Fed has no way out!
Bottom line: If you’re counting on the Fed to bail out the U.S. Treasury Department — or bond investors — forget it!
So far, I’ve focused on WHY bond prices are going to fall. Now, I’d like to shift to an even more important topic, namely ...
How Surging Rates Can Pummel Your Fixed Income Investments — and How You Can Protect Yourself
From Portfolio Devastation!
From Portfolio Devastation!
DO NOT MISS “The Final Chapter of this report:” How to USE this great bond market crash and interest rate explosion to go for windfall profits in 2010-2011  |
To some degree, they’re right. Higher rates would benefit savers. They would finally give seniors a chance to earn a decent yield. The problem is getting from where we are now (a low rate environment) to where we’re going (a high one). If you don’t avoid the nasty selling that’ll get us from point A to point B, your fixed income portfolio will be in shambles!
Here’s why ...
First, assume you own $100,000 worth of long-term Treasuries paying a coupon of 5 percent. That means you’d earn $5,000 a year in interest, or a yield of 5 percent annually.
Second, let’s say interest rates on long-term Treasuries surge to 7 percent. Your old bonds are still paying 5 percent in an environment where new bond buyers can earn two percentage points more in yield.
Are they going to pay full face value for your 5 percent bonds? Of course not! They’re going to pay you less — a discount to face value.
Third, let’s figure out what that discount would be. Investors wanting to buy your old bonds need to generate a 7 percent yield on $100,000 of securities that only pay a coupon of 5 percent, right?
To accomplish that, they’d have to figure out what dollar amount divided by $5,000 would equal 7 percent. The result? About $71,420 ($5,000/$71,420 = 7.0008 percent)!
Bottom line: An interest rate surge of only two percentage points would wipe out $28,580, or over 28 percent of the value of your bonds! Even the S&P 500 has only tanked that much (or more) four times in the last eight decades.
So, yes, higher rates are good news for savers ... but only the patient ones who WAIT for the interest-rate explosion of 2010-2011 and THEN buy long-term bonds. Buy too early and you’ll get slammed as prices tank and rates rise.
Fortunately, you don’t have to sit idly by while your fixed income portfolio is destroyed. You can take immediate action to avoid the carnage.
Step #1: Find out if you have a problem!
By now, you’re probably wondering how to suck out the poison in your fixed income portfolio. The good news? For mutual funds and exchange traded funds, it’s pretty easy. Your fund sponsor will gladly provide you with two key statistics: “weighted average maturity” and “average duration.” (These figures can also be found online.)The maturity figure tells you how long the bonds in the fund will take to close out, or mature. It’s expressed in terms of years, such as 4.5. The figure is further adjusted to account for the dollar sizes of each bond position.
Duration is another useful statistic. It’s a rough measure of how much a fund will decline in price for every percentage point rise in interest rates. For instance, a duration reading of 10 years means a fund will lose roughly 10 percent of its value if rates rise by 1 percentage point.
The higher the weighted average maturity of a fund, and the higher its duration, the riskier it is. So get these critical numbers and scrub your fixed income portfolio!
What about individual bonds? Perform the same exercise. Figure out how long your security has until maturity. The same rule that applies to mutual funds and ETFs applies to individual Treasury bonds, municipal bonds or corporate bonds, whether investment grade or junk: The farther out the maturity date, the more you stand to lose if rates surge.
Step #2: Dump the dead weight!
Don’t get caught up focusing on the income stream your fixed income investment is throwing off. Don’t fall victim to the misguided thinking that as long as you just hold your bond to maturity, you aren’t losing money.Technically, yes, a loss isn’t booked until you sell. But you can’t forget about opportunity cost! Think of what you could be doing with the money you have locked up in a bond that’s losing value. My advice: Apply the same thinking to your bonds that you do to your stocks.
For example, if you had a very strong feeling a stock was going from $20 to $10, would you just hold your 100 shares and let it happen? Or would you sell, sidestep the decline, then scoop up TWICE as many shares at the cheaper price — something that would magnify your profits down the road when the price rebounded?
Of course you’d do the latter. And that’s what you should do with your bonds. You can sell when, say, interest rates on 30-year bonds are 5 percent ... keep that money in cash and sidestep the price decline ... then swoop in and buy NEW bonds yielding 7 percent, 8 percent, or more!
My advice? If the average maturity of your ETF, mutual fund, or individual bond is greater than about two years, don’t wait around — sell. Fortunately these days, with nearly all bond funds and most bonds, you can sell at the market, with no hesitation. However, with some thinly traded corporate or municipal bonds, you may need to give your broker some leeway — to work your order at a more favorable price. Either way, get out as soon as you can!
To help you with the purging process, I’ve included in this report a list of 10 government bond mutual funds with some of the highest weighted average maturities and highest durations. These are among the most vulnerable funds in an environment of rising long-term interest rates.
I also give you a list of some of the 10 most vulnerable bond ETFs, each of which should get hammered as bonds decline in value. If you own any of these mutual funds or ETFs, I recommend you sell without delay!
You can buy Treasury bills straight from Uncle Sam via the Treasury Direct program (http://www.treasurydirect.gov or 800-722-2678). Or you can purchase them through your broker.
Another option? Treasury-only money funds. You can find a list of funds online at our website: http://www.moneyandmarkets.com/treasury-only-money-market-funds-35754
If you’re a conservative investor, the easiest way to escape the brutal grip of higher interest rates is to just sell your bonds and park that money in short-term Treasuries.
But what if you’re a more aggressive investor?
What if you’re the kind of investor who likes to go on the offense?
What if you want to turn rising rates into a potential profit goldmine?
Then I have good news for you. You don’t have to be an investing “whale” any more. You don’t have to be some hot-shot hedge fund trader, or the manager of some multi-billion dollar mutual fund.
You — the individual investor — now have several easy ways to convert a Treasury bond market collapse ... and a surge in interest rates ... into a huge profit opportunity!
You’re probably familiar with traditional ETFs. They buy a basket of stocks, allowing you to profit from moves in individual sectors ... the overall S&P 500 ... or even several overseas markets.
ETFs are great because they cost less to own than many mutual funds. They don’t nick you for loads of 12-b1 (marketing) fees. They’re priced continuously throughout the trading day, and you can trade them using all kinds of useful strategies, like pre-set stop-loss and grab-profit orders.
But you may NOT know that bond market ETFs have been proliferating like crazy. Just like stock ETFs, they own a basket of investments — but those investments are bonds, not equities.
A few examples: The iShares Barclays 20+ Year Treasury Bond Fund (TLT) invests in longer-term U.S. Treasuries, while the iShares 10+ Year Credit Bond Fund (CLY) buys longer-term investment grade U.S. corporate bonds and dollar-denominated bonds issued by foreign governments and other entities. Other long-term bond ETFs include the Vanguard Extended Duration Treasury ETF (EDV) and the Market Vectors High Yield Municipal Index ETF (HYD), with investments in Treasury “strips” and longer-term municipal bonds, respectively.
When you buy one of these ETFs, you make money from a rise in its price. If you want to profit from a DECLINE, however, you can “sell short” the ETF in question. In a short sale, you borrow shares, sell them, then hope for a price decline so you can repurchase the shares at a lower price.
The short-selling strategy can be risky, though. If the price of the ETF you’re targeting rises, you’ll lose money. You will also need special approval from your broker and a margin account to sell short a bond ETF. Moreover, you can’t sell short bond ETFs in a tax-privileged account, such as an IRA.
So how do you get around those problems?
Profit Tool #2: Inverse Bond ETFs
Over the past couple of years, an increasing number of INVERSE bond ETFs have hit the markets. These ETFs are designed to RISE in value when the targeted investment falls in price (or in the case of bonds, when interest rates rise.) In my view, they are a great tool to profit from falling long-term bond prices and rising interest rates. You don’t need a margin account — and purchasing one of these ETFs is just like purchasing any other ETF.
Three inverse bond ETFs in particularly target the longest-term part of the bond market — the portion I believe is the most vulnerable ...
- ProShares Short 20+ Year Treasury (TBF) — This inverse ETF is unleveraged. It’s designed to rise 1 percent for every 1 percent decline in the Barclays Capital 20+ Year U.S. Treasury Bond Index, a benchmark index that tracks long bond prices. The TBF has been around since August 2009 and features an expense ratio of 0.95 percent.
- ProShares UltraShort 20+ Year Treasury (TBT) — This inverse ETF is leveraged. It’s designed to rise 2 percent for every 1 percent decline in the same index listed above. ProShares introduced this ETF in May 2008 and it features an expense ratio of 0.95 percent. Unlike some leveraged ETFs, it has also done a fairly good job of tracking its benchmark over both the short term AND long term.
- Direxion Daily 30-Year Treasury Bear 3X (TMV) — This inverse ETF is even more leveraged. It’s designed to rise 3 percent for every 1 percent decline in the NYSE Arca Current 30-Year U.S. Treasury Index. That index tracks the price performance of the most recently issued 30-year Treasury Bond. Direxion rolled this ETF out in April 2009 and it features the same expense ratio as the other two ETFs listed here.
ETFs aren’t you’re only investment choice, either. You can also buy mutual funds that trade inversely to portions of the bond market.
For instance, the Rydex Inverse Government Long Bond Strategy Fund (RYJUX) is an unleveraged mutual fund that rises in value as bond prices fall. It features an expense ratio of 1.41 percent. Meanwhile, the Access Flex Bear High Yield Fund (AFBIX) is designed to move in the opposite direction of the price of high yield (junk) bonds.
If you’re comfortable trading futures, you can instead use instruments that change hands on the Chicago Board of Trade. The CBOT has a “long bond” futures contract that reflects the price performance of bonds with maturities of at least 15 years. It also just rolled out “Ultra” long-term bond futures that reference bonds with maturities of at least 25 years.
You could sell short a futures contract, or purchase put options on the long bond futures, to profit from falling bond prices. Each option represents the right — but not the obligation — to sell one Treasury bond future with a face value of $100,000 at maturity. The value of that right will increase as the price of the underlying futures contract falls.
Warning: Futures and future options are strictly for experienced traders familiar with the risks and potentially unlimited exposure.
In sum, there are numerous tools to turn the rising rate crisis into a fantastic profit opportunity! The key is knowing how to use them.
That’s what I’m here to help you with. I am now going to lay out to you where we are and where I believe we’re going — as well as how to play it.
Take a look at this chart. It shows the yield on the benchmark 10-year Treasury Note. You can see that yields traded all the way down to the 2 percent area in the depths of the credit crisis. Then they surged to just shy of 4 percent before pausing to catch their breath.
Now I believe that pause is just about over ... and that we are in the process of completing a powerful technical pattern called an “inverse head and shoulders.”
I have taken the liberty of labeling the “left shoulder” (LS), the “head,” and the “right shoulder” (RS) on my chart. Once we break the “neckline” in the 4 percent area, we should surge all the way to 5.25 percent or so. That would be a whopping 160 percent move or so off the low!
Other Eventual Consequences of Rising
Long-Term Interest Rates
For now and the intermediate-term future, the primary consequence of rising rates will be falling bond prices. Rates haven’t risen far enough, fast enough to get the stock market’s attention. The improvement in the global economy is also offsetting the impact of higher financing costs. Long-Term Interest Rates
Result: I do not advocate shorting the broad stock market yet strictly because of higher rates. I would rather you DIRECTLY profit from that rise using the DIRECT investments I mentioned earlier.
But later in the cycle, rising rates will matter. They will be pure poison for:
- The nation’s insurance companies, which are loaded with long-term corporate and government bonds.
- The nation’s banks, which are counting on low interest rates to raise funds for close to nothing.
- The nation’s utilities, which must continually borrow huge amounts of long-term money to finance their massive investments in power plants and facilities.
- The nation’s home builders, which are relying on cheap financing and Uncle Sam’s largesse to keep buyers coming in their front doors.
- The nation’s high-yielding REITs, which directly compete with bonds for fixed-income money. If yields on less-risky Treasuries rise, the value of Real Estate Investment Trusts will fall. Financing costs for commercial real estate projects will also climb.
- Foreign countries where interest rates are rising sooner and faster than in the U.S. can enjoy a major boost to the value of their CURRENCIES.
- Inflation and inflation fears, which almost invariably drive interest rates higher, also drive up the value of COMMODITIES.
- Virtually every nation, market and sector is impacted by interest rates — sometimes positively, sometimes negatively. So knowing when and how interest rates will move gives you a MAJOR strategic advantage with almost every investment on the planet.
Don’t Forget the Impact on Your Personal Finances!
Most of this report is dedicated to the INVESTMENT consequences of rising long-term interest rates. But you can’t forget the impact of rising long-term interest rates on your personal finances, either.For starters, long-term mortgage rates tend to track long-term Treasury yields. If yields rise on 10-year and 30-year Treasury notes and bonds, they’ll also climb on 30-year fixed-rate mortgages.
For most of 2009 and early 2010, 30-year mortgage rates fluctuated on either side of 5.25 percent. I expect them to head to the mid-to-high-6 percent area as a result of the bond market crash.
Rates on longer-term corporate loans, car loans, and fixed-rate home equity loans also tend to track longer-term Treasury yields. So you can expect those kinds of loans to cost more as Treasury-bond rates explode higher.
Variable rate home equity lines of credit, shorter-term business loans, and credit cards are not directly impacted by the rise in long-term rates. That’s because they usually track the London Interbank Offered Rate (LIBOR) or the prime rate; and these closely follow the very short-term federal funds rate controlled by the Federal Reserve.
But as time passes, the Fed will be forced to “follow” the bond market. It won’t be able to keep the fed funds rate pegged near zero percent. It will have to raise rates — whether it wants to or not — in order to show it’s trying to tamp down inflation and to reassure fleeing bond investors that it’s not going to let the value of their money collapse. When that happens, rates on these other kinds of loans will rise.
So what can you do to protect yourself?
- Lock in the longest-term mortgage you can get now if you’re buying a house or refinancing your existing loan. A rate of 5 percent and change is much better than you’re going to get six, 12 or 18 months down the road, in my view.
- Pay down or close any home equity line of credit you have — and work at paying off credit card debt. The interest costs on those debts are going to go up when the Fed is forced from the sidelines.
- Many banks also allow you to fix the rate on a portion of your home equity line of credit balance for a fee. Check to see if you have that option and if so, take advantage of it. The same would go for any business loans you may have outstanding.
Don’t Miss Part II of This Report: The Final Chapter
Any or all of the strategies I outlined earlier could help you profit as the long-term Treasury market collapses. And if you want to go it alone using the information in this report, that’s perfectly fine. But as you know, the bond market can be volatile. Both significant sell-offs AND significant rallies are commonplace. So precisely what to buy and sell ... how much ... and most important WHEN ... are critical. That’s what I cover in Part II of this report — my FINAL CHAPTER — all about how to use this interest rate explosion to go for windfall profits in 2010-2011.
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