Taking a Trip Through the Bond Market Twilight Zone

Wednesday, July 10, 2019

Cue the spooky music and the Rod Serling narration ... because it’s time for you to join me on a trip into the global bond market “Twilight Zone”! And believe me, this is one journey you can NOT afford to miss if you want to protect your wealth and profit.

In this wacky investment world ...

* Bonds with 100-year maturities are soaring in value. Everyone seems to be selling them, from higher-risk countries like Argentina and Mexico to lower-risk nations like Austria. I’m talking about gains of 19% or more year-to-date, even better than the S&P 500.

Never mind that Argentina has a long and storied history of defaults. Or that Austria wasn’t even a country in its current form just over a century ago. Yet, investors are tripping all over themselves to buy their debt.

* Riskier Eastern European bonds are popular. So popular that every single euro-denominated bond issued by the Czech Republic is trading with a negative yield. Ten-year Polish paper is offering just 0.16%.

* Meanwhile in France, the entire yield curve is negative out to around 10 years. In Germany, it’s almost 20 years. In Switzerland, it’s 40 years.

* Then there's Greece, where 10-year bonds ... which yielded 30 PERCENTAGE POINTS more than U.S. 10-year Treasuries in the early 2010s ... now yield just 0.12 percentage points more.

Yes, I’m talking about Greece. The nation that needed $375 billion in bailouts from the European Commission, European Central Bank and International Monetary Fund not too long ago. The market is now assigning its bonds a yield roughly in line with bonds issued by Uncle Sam.

* A handful of European “junk” bonds ... bonds issued by companies so troubled they can’t earn investment-grade ratings ... have now joined the negative-yield parade. A recent Bloomberg tally found 14 euro-denominated junk bonds offering less than zero, including those issued by Nokia, Altice France and Axalta Coating Systems.

All told, more than $13 TRILLION in bonds of all kinds from all corners of the world now sport negative yields. That’s a fresh record, even higher than we saw at the previous peak in 2016.

In what world does it make sense to charge a junk-rated company nothing to borrow money? In what world does it make sense to essentially lend out $100 on the promise you’ll get $99-and-change back a decade later?

All I can think of is that lyric from the musical "Hamilton" my daughters enjoy so much: A “world turned upside down.”

It’s easy to see WHY this is happening:

1) The global economy is in trouble, and

2) Central banks are frantically trying to respond.

ECB members are openly talking again about the potential for fresh rounds of so-called “stimulus.” That could include more deeply negative interest rates, more bond buying/QE or other measures.

Never mind that we have several years of evidence from Japan, Europe and elsewhere that it doesn’t actually “work” in terms of spurring sustainable growth and inflation.

Of course, that won’t stop policymakers from throwing more “monetary spaghetti” at the wall to see what sticks. Add in a U.S. Federal Reserve that might cut rates, and boom! The door to the bond market Twilight Zone swings wide open.

So, what does it all mean to you as an investor? A few things ...

First, it’s a great reason to buy gold and gold miners. Gold “yields” 0%. But that’s better than the negative-whatever you can get on $13-trillion-and-counting worth of bonds.

I believe the recent gold rally is just the start of a new bull market in the metal – one that’s worth profiting from. You can get started with something as simple as the SPDR Gold Shares (GLD, Rated “C”).

Second, it’s proof that the global economy is slowing and recession risk is rising. After all, investors wouldn’t be plowing their money into long-term bonds if they were worried about accelerating growth and rising inflation. Doing so would be the financial kiss of death because those forces cause bond prices to plummet.

My recommendation? Stick with stocks that do best at the tail end of economic expansions and the beginning of recessions. Think lower-volatility, dividend-paying issues like utilities, select REITs, consumer staples and so on.

You’ll find my favorites in the Safe Money Report. Or there’s always something like the Utilities Select Sector SPDR Fund (XLU, Rated “B”).

Third, intermediate-term Treasuries and funds that invest in them are likely to benefit if I’m right about a coming recession. And they’re likely to “win” if global interest rates continue to sink inexorably into the quicksand, dragging U.S. yields down with them.

I recently recommended a couple of different ways to profit in Safe Money. But if you aren’t quite ready to join me, then at least consider something like the iShares 7-10 Year Treasury Bond ETF (IEF, Rated “C”).

And by all means, buckle up. This journey into the Twilight Zone isn’t going to be smooth. It’s going to be bumpy. But I’ll do my best to guide you through it in the weeks and months ahead.

Until next time,


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