Nick’s Note: Now that bond yields are on the rise, many are saying that the bond bull market we’ve been in since 1981 is starting to unravel.
It’s something Palm Beach Letter editor Teeka Tiwari is following very closely. Many people think of Teeka as just a cryptocurrency expert. But he was also a very successful hedge fund manager back in the 2000s. When he says something is a big deal—no matter if it’s cryptos or traditional assets—it usually turns out to be.
So, I recently called Teeka to talk about rising interest rates and how they affect you. The transcript of our conversation is below… and be sure to stick around for our March Elite 25 update at the end of today’s issue.
Nick: T, interest rates are on the rise. The Federal Reserve is slowly moving up short-term rates. And the 10-year Treasury, which many consider the “risk-free” rate, is near four-year highs at 2.85%. Why should readers care?
Teeka: Because anyone holding bonds is about to get annihilated. Especially those holding long-term bonds.
You see, bond prices move inversely to yields. So when yields start going up, bond prices go down.
For the past 35 years, bond yields have generally gone down. And bond prices went up. And when something happens for that long, people start to call it a “safe investment.” But bonds are anything but safe. Already since September of last year, we’ve seen some long-term bond funds lose nearly 9%.
And this is far from over… Right now, we have rising interest rates and rising inflation. The last time we saw this happen was in 1981. The bond market fell 19% that year.
That was the tail end of a brutal 30-year bear market in bonds. During the last bond bear market, investors saw the value of their “safe” investments collapse 60%.
I believe we’re at the beginning of another long-term bond bear market.
Nick: I agree. Just last week, I wrote to Daily readers about how rising interest rates are crushing “bond replacements.” But we’re not the only ones saying this, are we?
Teeka: No, we are not. Just this weekend I forwarded you Warren Buffett’s thoughts on bonds. Buffett, whom many consider to be the world’s greatest investor, just released the annual report for his holding company Berkshire Hathaway. This is a must-read for anyone even remotely interested in the stock market.
In this report, Buffett says, and I quote, “bonds had become a dumb—a really dumb—investment compared to American equities.”
Now this is the world’s greatest investor saying this. But he wasn’t done.
He went on to say that “often, high-grade bonds in an investment portfolio increase its risk.”
He said this about a decision to move money out of bonds and into stocks in 2012. But this is still true today. The 10-year yield is still less than 2.9%. Its long-term average, which is where it should be, is 6%. There’s still lots of risk in bonds.
I know many readers are retirees or at least nearing retirement… and are dying for yield. But don’t buy into bonds yet. Things are probably going to get worse.
Nick: So what do you recommend for readers looking for yield?
Teeka: The solution is part of our “income extermination” plan.
“Income extermination” is what I’ve been calling this inevitable decline in high-yielding investments.
Now, I’ve been talking about this since 2014. And admittedly, I was a little early. But anyone who followed my advice didn’t lose any money. In fact, they would be doing a lot better than holding bonds.
The floating rate fund I told readers to buy in January 2014 gives us a 6% yield. Plus, we have a 20% capital gain on the position. That’s almost a 10% annual return—more than 3.5 times the annual return of buying 10-year Treasuries at that time.
This fund is still buyable for Palm Beach Letter subscribers, so I can’t give away the name. But funds like this are perfect for a rising interest rate environment.
I urge all Palm Beach Letter subscribers to go and look at our income extermination plays. Especially the new emerging markets closed-end fund I just recommended last week.
We’ve had really good results with our closed-end fund (CEF) strategy.
What I like to do is find a fund trading at a discount to the net asset value (NAV). This allows us to get a deal. If a fund is trading at a 15% discount to the NAV, that means we‘re paying $0.85 to get $1 worth of securities.
One place I send people who want to try this strategy on their own is CEFconnect.com. This website allows you to screen for closed-end funds trading at a discount to NAV. Once you get that list, you can investigate each one until you find a fund you like.
Nick: Thanks for your time, Teeka. I’m really excited about the emerging markets fund—it’s something Daily readers can really benefit from. I hope they take your advice and avoid the income extermination.
Each month, we update our Elite 25 portfolio. We remove stocks that are too expensive and replace them with new stocks that meet our three criteria for elite status.
February was a down month for the overall market, including the Elite 25. The portfolio underperformed, falling 5.1% compared to a 3.6% drop in the S&P 500.
Don’t get discouraged, though… When the market turns, this portfolio will likely outperform the S&P 500.
Gun retailer American Outdoor Brands (AOBC)—which plunged 25%—dragged down the portfolio. Gun stocks took a hit after last month’s mass school shooting in Florida.
On the upside, Herbalife (HLF) rose 15% after hedge fund manager Bill Ackman covered his short position… and National CineMedia (NCMI) rose 14% as people flocked to movie theaters to see the smash hit Black Panther, which has raked in nearly $600 million worldwide.
There is a lot of activity this month, which is common around earnings seasons.
Gilead Sciences (GILD)
L Brands (LB)
Ruth’s Hospitality (RUTH)
Altria Group (MO)
Ituran Location and Control (ITRN)
O’Reilly Automotive (ORLY)
Pilgrim’s Pride (PPC)
[Palm Beach Letter subscribers can read our Elite 25 special report right here.]
P.S. Are you following our Elite 25 strategy? If so, we’d like to hear how it’s working for you. Let us know right here…
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And ever since then, he’s been using it to book countless triple-digit gains for his readers—not the big-money firms beating down his door to learn what it is.
To discover this secret for yourself—and learn how you can profit from it—click here.