The world’s largest bond exchange-traded fund (ETF) is on pace for its worst year ever.

The iShares Core U.S. Aggregate Bond ETF (AGG) is down almost 4% since January. If it keeps up that pace, the fund will lose 8% of its value by the end of the year.

That’s more than double its previous worst year. In 2013, AGG lost 4% after investors fled the bond market during the infamous Taper Tantrum.

The tantrum happened after the Federal Reserve announced it would gradually end (taper) its policy of buying bonds on the open market.

Bond investors panicked and fled in droves… The ensuing tantrum sent prices down and yields up (bonds prices and yields move inversely).

Fortunately for those who stayed in bonds, the Fed relented and continued to purchase bonds in 2013.

But don’t expect that to happen this time…

The Fed has stopped purchasing bonds. In fact, it’s shrinking its holdings. And when the biggest buyer of bonds leaves the market, an exodus of income will follow.

We call this Income Extermination. And it’s a theme we’ve been following for months…

We don’t expect the Fed to reverse its policy like it did in 2013. The economy is stronger now than it was then. And the market hasn’t panicked like it did before—yet.

But if AGG is any sign, the bond markets are in trouble. That’s why you need to act now.

Bonds Are No Longer Safe

For years, Wall Street touted bonds as “safe” investments. And for the most part, they have been. For the past 35 years, bonds have been in a bull market…

But before that, they went through a 34-year bear market… During that span, rates on the 10-year Treasury rocketed from 2% to 16%.

If the Fed continues its plan to unwind its balance sheet, we could be headed into another bond bear market.

Investors who held 10-year Treasury bonds during the last bear market lost nearly 60% of their investment capital in real terms. In other words, they lost more than half their spending power.

I don’t know about you, but I won’t be able to retire if my investments lose 60% of their value. I’m sure many of you are in the same boat.

One of our goals here at the Daily is to help you achieve a dignified retirement.

That’s why Income Extermination is a story we’re following very closely. We want to make sure your nest egg remains intact.

But if you want your nest egg to grow, you need to avoid long-term bonds. They’ll get crushed by rising rates.

And as you can see in the chart below, interest rates are on the rise…

So-called bond replacements are getting hammered, too. These are stocks that generally pay high dividends. Investors like them because they provide steady income.

Examples include utility companies or consumer staples firms like Procter & Gamble and Johnson & Johnson.

Since November 2017, utilities are down 13%. And since January 29, consumer staples are down 15%. I doubt they’re done falling.

The downtrend in bond replacements is another sign that income exodus is underway…

Two Safe Havens From Income Exodus

If you’re looking for safe income plays, you can consider buying short-term government bonds. These are bonds that mature in two years or less.

The four-week U.S. treasury note yields 1.59%. That’s 159 times more than the paltry 0.01% yield you’ll get in your savings account.

For every $20,000 you put in the four-week note, you can generate $320 per year in interest income. That beats the $2 per year you’ll get in a typical savings account.

If you want to generate even 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 Extermination.

Since adding CEFs to the PBL portfolio in 2016, Teeka’s averaged realized gains of 18.4%, which beats the S&P 500 by 16.5% during that span—all while collecting yields averaging more than 300% greater than the S&P 500’s.

If you’re not a PBL subscriber, you can learn more about Teeka’s strategy to survive and thrive during Income Extermination right here…

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. Teeka tells me that for a limited time, he’s giving a copy of his report, “How to Survive and Prosper in the Coming Income Crisis,” to new subscribers for free. This report includes 277 red-flag investments to avoid… plus two CEFs that pay nearly twice as much as what you’d get from a 10-year Treasury. (And much more.)

Click here to learn how to get your free copy today…

MAILBAG

In Tuesday’s Daily, we graded President Trump based on whether he’s accomplished his campaign pledges. Readers had mixed responses to our report card…

From Robert J.: Are you crazy? Tariffs do nothing but drive up costs. Anybody who would give Trump an “A” on trade policy is an idiot!

Nick’s reply: Hi Robert. You may want to read our report card again. It’s not based on whether Trump’s policies are good or bad (In fact, longtime readers know we’re big supporters of free trade.) We based the grade on whether the president accomplished his campaign promises. He pledged to impose tariffs on other countries. He’s done that… So he gets an “A.”

From Louise K.: Your Trump report card is an insult. To achieve 4% GDP in one year is fantastic. President Obama never came close. The new tax code is a great improvement, too. What about booming businesses, employment hiring, raises, and bonuses?

We are finally getting respect from other countries because our president puts America first (as do most other countries, I might add).  

And on the wall… It isn’t built yet, but not for lack of trying. With all the opposition to President Trump, it’s incredible he has accomplished all that he has. If this is how you think, I no longer value your opinion on stocks. I didn’t sign up for your political opinion. I will not renew my subscription.

Nick’s Reply: At the Daily, we don’t mix our political views with our market commentary. We just state the facts as we see them. For example, if you avoided the stock market just because you didn’t like President Obama, you would have missed out on the chance to at least triple your money. And regardless of what you think about President Trump, the market is booming under his leadership.

But you do have one point, Louise. GDP growth over 4% should result in an “A.” But here at the office, we look at “real” GDP growth. Real GDP takes inflation into account. And real GDP has only grown 2.8%.

We like using real GDP because it shows how much the economy actually grew. Inflation can make that number look better than it really is. But to be fair, President Trump didn’t say anything about inflation. And GDP did grow over 4%. We’ll update accordingly…

However, we stand by our other grades. Did President Trump reform taxes? Yes. Are taxes lower? Yes. But did he do all that he said he’d do on taxes? No, not even close.

During the campaign, Trump said he’d make the tax code so simple, we could file our taxes on a postcard. That didn’t happen. He didn’t cut the tax rate to 15%, either. And the tax cuts he did pass mainly benefited corporations, not individuals. It’s a start, but it’s a long way from what he promised.

And we don’t give A’s for effort at the Daily. Trump is trying to get a wall, but it’s not being built. We gave him a “D” for trying… Until the wall goes up, that’s where it stays.

Now, there’s still time for improvement. Trump has at least two-and-a-half years left in his term to raise his grades. It’s an ambitious agenda… and it’s probably impossible to get it all done… But we’ll continue holding him accountable to what he said—and more importantly, show you how to profit along the way.

How would you grade President Trump on his campaign promises? Let us know right here…

IN CASE YOU MISSED IT…

Today, we have a special message from PBRG’s very own Teeka Tiwari…

At a closed-door conference in Miami Beach, I got to know a man I call the Billionaire Broker. His background and his system impressed me.

His full identity will be made public on June 14, but I want to make sure you know about this impressive trader before then.

I endorse him and I endorse his system. But I don’t give my endorsement lightly.

I have to be thoroughly convinced that someone is credible and highly successful before I’d even think about endorsing them.

You can learn more about this master trader by clicking here…