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  • Global Bonds In Worst Selloff In 13 Years - How Come?

    Bond investors have had a rough ride in November. The Barclays Global Aggregate Bond Index plunged by 5% during the last two weeks just before and after the election – its worst such drop since March 2003, according to Dow Jones data. When yields rise, bond prices fall, and vice-versa.

    As you know, interest rates have been falling for over 35 years since peaking in 1980. It has been a spectacular bull market for bond investors, that is until just recently. To say that the reversal over the last few weeks came as a surprise to bondholders around the world is an understatement.

    More than $77 billion in assets are benchmarked to the Barclays Global Aggregate Bond Index, according to Morningstar, making it one of the most widely followed in the fixed-income world. It incorporates investment-grade debt denominated in 24 different currencies. Sovereign bonds have historically been the Index’s most heavily-weighted constituent, followed by asset-backed securities, corporate bonds and government-related debt.

    Global bond yields have been edging up since falling to historic lows in late June/July following the UK’s vote to leave the European Union. But the selloff accelerated aggressively after Donald Trump won the US presidential election – an outcome that took most bond market participants around the world by surprise.

    The sharp selloff was predicated on the notion that Donald Trump’s campaign promises to rebuild America’s infrastructure, cut taxes and raise trade barriers, would – if they become reality – drive up inflation, and possibly force the Federal Reserve to raise interest rates much more aggressively than had been expected.

    In just the two days following Trump’s election, global bonds shed an estimated $1.1 trillion in value, the worst rout in a year and a half as investors sold bonds and bought stocks in many cases. The stampede out of bonds propelled US Treasury yields to their highest levels since January.

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  • Interest Rates Have To Go Up. The "Bond King" Says No

    The prevailing view on Wall Street and Main Street is that medium and long-term interest rates have to go higher in the months and years ahead. Interest rates have to get back to “normal” at some point, so we’re told. Yet in the last several months, yields on 10-year Treasury notes and 30-year Treasury bonds have fallen rather significantly. What’s up with that?

    Last week, PIMCO’s founder Bill Gross – aka the “Bond King” (because he runs the largest bond fund in the world) – predicted that medium and long-term rates are going down, not up. For reasons I’ll explain below, Gross makes a case for falling yields going forward. His latest prediction is clearly out of step with the mainstream, but I thought you would appreciate his thinking, even if you disagree.

    Next, some new data reveal that over 40% of retiring Americans start taking Social Security benefits at age 62, which means they will get less money overall than if they had waited until later. In most cases, you should delay taking Social Security benefits until age 70 if possible. Given that we are in the investment/financial planning business, we are often asked for advice on when to take Social Security.

    As it turns out, the best article I’ve ever read on this subject appeared over the weekend in RealClearMarkets.com. The piece is written by award-winning author and lecturer John F. Wasik. Today, I’ll reprint that article in its entirety. Even if you’ve already had to decide when to take Social Security, this article would be good to pass on to others who are nearing Social Security eligibility.

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  • Some Scary Bumps in the Road Just Ahead

    The major stock indexes moved lower after setting new record highs in early August, although prices have recovered somewhat in the last few days. So was the weakness in August just an overdue correction before moving even higher? Maybe, but there are a number of things coming up in the next month or so that could rattle the markets even more, including whether or not we go to war with Syria.

    Clearly, the stock and bond markets continue to be nervous about the Fed cutting back on its QE bond and mortgage purchases, perhaps as soon as the Fed’s next policy meeting that ends on September 18. There is also some anxiety about who will be the next Fed chairman (or woman).

    Yet there are other upcoming concerns that the markets seem to be worried about, as well they should. Certainly, the continued rise in interest rates is a serious issue for the markets and the economy. The yield on 10-year Treasury notes has soared from 1.6% back in May to near 3%. Long bond yields are nearing 4%. Investors don’t know what lies ahead.

    The markets are also starting to factor in the looming battle in Washington over the federal budget for FY2014, which begins on October 1. President Obama vows he won’t negotiate this time around. Also, there is another battle over the debt ceiling coming by mid-October and yet another threat of a government shutdown.

    We'll look into all of these issues today and how they may affect the markets.

    But before we get into those issues, let’s examine last Friday’s jobs report for August. The White House and the media hailed it as a success since the headline unemployment rate fell from 7.4% to 7.3%. What they failed to point out was the decline occurred because a lot more folks dropped out of the labor market. Truth is, the report was once again a disappointment.

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  • Fed Sparks A Stampede Out Of Bonds

    No doubt you are aware that interest rates have spiked higher in the last two months. As a result, there is a stampede to get out of bond funds that have been clobbered recently. I have been warning about this repeatedly since late last year. Now it’s happening and it may well continue. We’ll discuss that more as we go along today.

    With the Fed’s latest decision to start winding down its unprecedented quantitative easing stimulus program later this year, the investment markets are not happy. Stocks, bonds and precious metals have been hit hard in recent days and weeks. While stocks and bonds have recovered modestly, the selling pressure may not be over. Investors are really nervous!

    On the political front, President Obama just can’t help himself. Despite the various scandals swirling around his administration, he has resurrected his formerly failed plan to institute a new tax on carbon emissions. Only this time he plans to circumvent Congress and enact this costly tax via the Environmental Protection Agency and new Executive Orders that are almost impossible to reverse. He apparently does not care that a new carbon tax will increase energy prices for everyone, including low income folks who will be hit the hardest.

    But before we get into those issues, let’s take a quick look at the latest economic reports, including last week’s very discouraging 1Q GDP report that showed the economy is still just limping along. From there, we’ll look at some other economic reports which offer at least a little encouragement.

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  • Who Cares if There’s a High-Yield Bond Bubble?

    The demand for high-yield bonds and bond funds has literally exploded over the past couple of years as the Fed continues to keep downward pressure on interest rates. Often known as "junk" bonds, these debt instruments typically pay a higher rate of interest to compensate for their higher potential for default. Some retirees see this higher income as a godsend, but the higher yield definitely comes at a price.

    Unfortunately, many high-yield bond investors are buying and holding these bonds and bond funds without regard to the risks they are taking. As the number of analysts predicting a high-yield bond bubble increases, the risks of buying and holding these securities increases.

    This week, I call upon high-yield bond expert, Steven D. Landis, CFP®, to shed some light on how you can participate in the higher yield and potential capital gains in high-yield bonds while minimizing the risks of doing so. He'll also explain why it really doesn't matter whether there's a high-yield bond bubble now or in the future, IF you have the right strategy on your side.

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  • The US Bond Bubble Continues to Mushroom

    It was very tempting today to focus entirely on the “fiscal cliff” especially now that it is very clear that President Obama is more than willing to take us over it. Treasury Secretary Geithner made it clear to congressional leaders last week that the president will insist on his proposals for dealing with the fiscal cliff, which include $1.6 trillion in tax increases, very little in spending cuts (that may never happen) and the permanent end of the debt ceiling.

    Yet talk about the fiscal cliff is everywhere in the media 24/7. So rather than repeat what you probably already know, let’s revisit a topic that should be near and dear to almost everyone who reads my E-Letters. That would be the bond market bubble. If we do go over the fiscal cliff, that could be bearish for bonds. Fortunately, I have an “alternative” that has the potential to make money if the bond bubble bursts.

    Keep in mind that JPMorgan Chase estimates that a mere 1% rise in long-term interest rates will result in up to a 20% loss of value in long-dated bonds, including Treasury bonds. This is a topic that should be on every investor’s mind.

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  • Bond Investing - It’s the Short Side, Stupid

    As all of my readers know by now, I'm a political junkie. I love bringing parallels between politics and investments to your attention, since the two are very interrelated. Today, we're going to discuss how a cliche coined to help win an election can be useful to Treasury bond investors.

    There's no doubt that Treasury bonds are at historically high prices, making them quite risky for the future. However, there are ways to make money when bond prices go down, which is where I think bond investors need to be concentrating right now. In other words, when I ask myself where potential Treasury bond opportunity lies, the answer comes back: "It's the short side, stupid."

    Even so, bond-king Bill Gross found out that there was still some upside for Treasury bond prices when he exited the market in 2011 and missed out on some good gains. What's needed is an investment that can go both long or short, depending upon the market environment. Today, I'll introduce you to just such an investment - the Equity Alternative Program. Since its inception in 2007, Equity Alternative has produced an annualized gain of over 19%, net of fees. You'll definitely want to check this Advisor out in more detail.

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  • Will The Bond Mania End Ugly?

    Since the stock market bottom in March 2009, the S&P 500 Index has almost doubled. That’s a gain of apprx. 100% in three years. Yet investors have been dumping stock mutual funds like they’re the plague over this same period. It is impossible to know where the millions of investors that have redeemed from stock funds over the last several years put all of their money, but it is clear that a lot of it went into bond mutual funds.

    Over the past several years, we have seen a stampede into bond funds, and especially US Treasury bonds funds. Investors around the world are seeking the perceived safety of US bonds. Many probably don't realize that bonds can be just as volatile as stocks, and sometimes more so. When interest rates do move higher, bond investors will experience losses - how severe we don't know.

    The Fed says it's committed to keeping short-term rates interest rates low through late 2014. Yet with the yield on the benchmark 10-year Treasury Note now below 2%, it is hard to see rates moving much lower. If you are overweight in bonds, now may be a good time to take some profits and lighten up. We have a professionally managed bond program which can invest either long or short, in addition to the convertible bond program offered by Wellesley Investment Advisors.

    At the end of today's letter, I'll show you a brand new presidential election poll from Rasmussen that is very surprising, at least to me. Rasmussen did a poll with a three-man race - Obama, Romney and Ron Paul as an Independent - and guess who wins by a comfortable margin? You may be as surprised as I was.

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  • European Debt Crisis Never Went Away

    Since December, the European Central Bank has loaned over 1 trillion euros to banks in southern Europe. These were three-year loans with an interest rate of only 1%. The banks used most of this money to buy up sovereign bonds of their home countries. This served to drive down bond yields around the region, and most observers assumed that the European debt crisis had been solved - at least for a while.

    Yet over the last few weeks, the unexpected has happened: bond rates in countries like Spain and Italy have started to rise again to dangerously high levels. Ten-year Spanish bond yields climbed to the highest level since the ECB started allocating three-year loans in December. Yields rose above 6% last Friday and yesterday, which sparked new concerns that Spain may need yet another ECB bailout. Making matters worse, Spain's economy slipped back into recession in the 1Q.

    Interest rates are also rising in Italy, and its economy appears to have dipped into a recession as well. All of this news has accelerated concerns that the financial crisis in Europe is back. Yet I argue today that the debt crisis never went away! Don't be surprised if this problem returns to center stage over the weeks just ahead, and if it does, this will not be good news for equity markets around the world.

    While US stocks are enjoying a very strong day today, there's a critical government bond auction in Spain on Thursday; Italy has a big bond auction on April 27; and Spain has another large bond auction on May 3. If interest rates continue to rise and/or if Spain and Italy have trouble finding enough buyers, this will be bad news. That's our topic for today.

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  • Will the Bond Bubble Burst This Year?

    Today, there are more people invested in US bonds (of all types) and bond mutual funds and ETFs than ever before. The degree to which this shift from stocks to bonds occurred in the last few years is simply stunning. For the period from 2007-2011, ICI reports that a net total of $408 billion was redeemed from US equity mutual funds – that’s huge!

    A record $792 billion in new money was invested in US bond funds in 2007-2011. While not all of the equity outflows immediately went into bond funds, this represents a shift of over $1 trillion in five years! A shift of this magnitude has never happened before. Is this a signal that the bull market in bonds is just about over? Could well be.

    Today, we look at reasons why long-term interest rates could rise this year. While the Fed has promised to keep short-term rates near zero well into 2014, this doesn't mean that bond rates can't move higher this year. The US economy is improving, albeit very slowly, and inflation hit 2.9% in the 12 months ended in January, and the European debt crisis is far from over. These are not good signs for bonds.

    Bonds have been a terrific investment for the last several years, but the bull market is now quite long in the tooth. If you are overweight in bonds, I would highly recommend that you take some profits and consider moving that money to an actively managed bond program such as Wellesley Investment Advisors with the potential to make money whether bonds go up or down (no guarantees of course).

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  • Treasury Yields Fall to Record Lows, But...

    IN THIS ISSUE:

    1.  Treasury Note Yields Fall to All-time Lows

    2.  Bernanke Confirms That Inflation is Too Low

    3.  More Reasons Why QE2 May Not Work

    4.  New Fed Report on Tepid Small Business Lending

    5.  Is the Bond Bull Market Nearing the End?

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