The chart is of the long-bond yield. The "long bond" is the nickname for the 30-year Treasury bond.
As I wrote in my last essay, long-bond prices are plummeting right now. They have just broken down to new five-month lows... and the selling pressure is so strong, not even the Fed's printing press can hold prices up.
When the long bond falls in price, its interest rate rises... The long bond's yield was as low as 2.5% in December. It has now risen past 4%. This could be a huge problem for income investors.
The long bond competes with other income investments for investor capital. So a rise in the long bond's interest rate can crush certain income investments. Let me explain...
If the long bond's yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.
Here's the problem: For yields to rise that much, prices must fall – a lot.
So right now, as long-bond rates rise, buying income investments is a treacherous proposition. Here's the advice I gave to readers of my 12% Letter on how to safely earn income in a bond bear market...
First, keep compounding. When you reinvest your dividends, your dividends start paying dividends, too. Compounding is a powerful force that builds fortunes. A bear market in the long bond will NOT hurt the power of compounding.
Second, the "junkiest" bonds and high-yield stocks will suffer the most from a long-bond bear market. Avoid risky income investments that use debt and financial engineering to pay large dividends. Stick with only the best-quality, high-cash-flow businesses that relentlessly raise their dividends.
Finally, make sure you understand how to trade a covered call. Covered calls are the perfect strategy for collecting income in a bond bear market. Unlike bond coupons or stock dividends, the yield you earn from selling covered calls has nothing to do with market interest rates or credit quality. You can generate double-digit dividend yields without taking big interest-rate risks.
Take these precautions, and you should have no problem earning high income yields in a long-bond bear market.
Good investing,
Tom
P.S. You can learn exactly how to protect your income portfolio with a subscription to The 12% Letter. Now is the perfect time to take advantage of these ideas. To learn more about a subscription, click here.
We nailed it almost to the day. Copper plunged 12% after that column. Well, we're making another imminent "short-term correction" call today. This time, it's for the stock market.
Markets are like runners. They can't run flat-out for long before getting "winded." Rallies eventually stumble and shake off the latecomers. These shake offs are usually fast and severe. And now that the S&P 500 has sprinted 32% in less than a month... now that the average investor is "hot for stocks" again... we're due for a correction right now.
Keep in mind... this is no "long-term" call. It's simply an observation that stocks are incredibly popular right now... and overstretched by nearly every indicator we use to monitor the internal health of the market. For those of you in the trader camp, here's the low-hanging fruit.
Today, I'm going to share several of my favorite technical indicators and patterns. Becoming familiar with them will help you to spot the best trading opportunities in the market.
