Income Exodus is finally upon us…

At the Daily, we’ve been warning readers for months that rising interest rates will lead to an exodus of investors from the bond markets.

Income Exodus (or Income Extermination) is when bond investors get “exterminated” by rising interest rates. As interest rates rise, bond prices drop. So when interest rates rise rapidly (like they are now), bond prices drop a lot.

Now, we’re seeing this exodus play out in real time.

As of last week, bondholders lost nearly $1 trillion according to the Bloomberg Barclays Multiverse Index…

This index tracks the market value of publicly traded bonds around the world.

The reason it’s down is simple: The rate on the benchmark 10-year U.S. Treasury has risen from 2.8% to 3.2% since August 24.

Bloomberg says the bond rout could spark an even worse sell-off than in 1976, the worst year for bond returns over the last four decades.

And there’s good reason for fear…

The Federal Reserve has already hiked rates three times in 2018… with plans for one more rate hike before the end of the year. And Fed chair Jerome Powell has indicated at least three more rate hikes in 2019 and one more in 2020.

We’ve warned you that higher rates were coming for more than a year now. Hopefully, you’ve followed our steps and prepared for Income Exodus… because it’s here.

If not, we’ll show you how to protect your portfolio from extermination. But first…

Bond Investors Are Panic-Selling

Bondholders are selling their positions at the fastest clip in years. The iShares 20+ Year Treasury Bond ETF (TLT) had its two biggest weeks of withdrawals in over a decade.

In July 2018, we specifically told you to stay away from all long-dated bonds (see July 30 Daily, “Teeka Tiwari on Inflation and Income Exodus”). If TLT investors had listened, they would have saved 21% of their capital.

But it’s not just “safe” government bonds that are getting creamed. So are “junk” bonds. Take a look at this chart of the SPDR Bloomberg Barclays High Yield Bond ETF (JNK):

It hit 52-week lows on October 10… and it’s down 7% over the past 12 months.

Investors are also selling their junk bond holdings. According to Bloomberg, nearly $1.5 billion fled from junk bond ETFs last week. That’s the most in six months.

It takes large institutions to trigger this much selling. And if the smart money is fleeing bonds, it’s a sign that the worst is yet to come…

That’s why you need to prepare now.

How to Insulate Your Portfolio

If you’re looking to protect yourself from Income Exodus, consider buying short-term government bonds. These are bonds that mature in two years or less.

Their par values won’t decline much as interest rates rise. That’s because the closer a bond is to maturing, the less its price fluctuates due to changing rates.

Right now, you can get a 2.9% yield on the 2-year U.S. Treasury. It’s not a lot… But it’s 29 times more than the 0.1% most large banks offer on their savings accounts.

And if you want to generate bigger returns, you can consider buying closed-end funds (CEFs).

It’s a strategy that Palm Beach Letter editor Teeka Tiwari has used over the last three years to sidestep Income Exodus.

Since adding CEFs to the PBL portfolio in 2016, Teeka has averaged realized gains of 15.4%—compared to a 12.6% annual return by the S&P 500 during that span. And the yields collected over that time were nearly 300% greater than the S&P 500’s.

(PBL subscribers can view Teeka’s buyable CEF recommendations right here.)

You can follow our three-step strategy to find your own quality CEFs right here…

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. If you’re not a PBL subscriber, you can learn how to create your own “stealth” income stream from the market right here…

CHART WATCH

Nick’s Note: Each morning, Palm Beach Trader editor Jason Bodner runs his proprietary “early detection system” on over 5,000 stocks. His system finds quality stocks that are being pushed higher by unusual levels of institutional buying. But he can also see when there’s an unusual amount of selling—and that can provide traders with a great entry point…

Why We Should Buy This Oversold Sector Now

By Jason Bodner

Last week, the market fell 6% across four days. After months of continuous growth, why the sudden drop?

Fearing higher interest rates would crimp economic growth, investors sold some stocks.

But this was an overreaction. Based on the last five years, selling of this magnitude is very rare and usually short-lived. So this is just a short-term dip, which means we now have a buying opportunity.

We saw the most irrational selling in the Consumer Discretionary sector—which includes companies that sell products such as home improvement items, clothing, media entertainment, and cars.

As you can see in the chart below, we’ve only seen companies in this sector oversold three other times in the past five years (the red lines):

Each time these stocks sold off this much (a pullback of typically 10% or more), the sector finished higher over the next eight weeks—by an average of 9%.

So seeing the Consumer Discretionary sector’s sell-off last week tells us we’re getting ready for a similar setup.

The simple, one-click way to play this trend is with the Consumer Discretionary Select Sector SPDR ETF (XLY). It has exposure to the sector, and its biggest holdings are Amazon, Home Depot, and McDonald’s.

With the recent volatility, XLY might not go straight up… But I like the chances that it’ll go higher by mid-December.

—Jason Bodner

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