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Government Bond Rout: Are You Safe?

Wednesday, July 1, 2015
Money and Markets
You can also access this issue on our website.
Government Bonds Routed! Are You Safe?

  By Mike Larson

Pull up a chart of the Vanguard Extended Duration Treasury ETF (EDV) on your favorite trading platform. Or just look here …

EDV2 Source: Bloomberg

Doesn’t look pretty, does it? This ETF that owns long-term U.S. government bonds is getting routed – down to around $108 from a high of almost $142. That puts it almost all the way back to where it was trading this time last year.

Since yields move in the opposite direction of bond prices, we’ve seen the 30-year surge to around 3.2% from 2.2%. That’s one heck of a move – more than 45% in just a few months. Heck, we gained more than 11 basis points today alone.

What’s going on? Take your pick of factors. The U.S. economy continues to chug along, with ADP suggesting today that we created 237,000 jobs in June. That beat forecasts for 218,000, and was the strongest reading since December.

The Greek debt crisis is rattling sovereign-bond markets in Europe on one hand. On the other, the Puerto Rican debt crisis is raising questions about the safety of municipal bonds.

Market Roundup
Dow +138.40 to 17,757.91
S&P +14.32 to 2,077.43
NASDAQ +26.26 to 5,013.12
10-YR Yield +0.083 to 2.418%
Gold -$4.10 to $1,167.70
Oil -$2.47 to $57.02

Several ETFs and mutual funds that own higher-risk PR bonds got rocked this week. They include the $1.6 billion Market Vectors High-Yield Municipal ETF (HYD) and the Rochester Virginia Municipal Fund (ORVAX), which despite its name does own a big chunk of the commonwealth’s obligations.

Finally, Federal Reserve officials are making noises about raising interest rates as soon as September. They remain concerned about what’s going on overseas, as well as the value of the U.S. dollar. But they’re definitely closer to a hike now than they’ve been at any point in the last several years – which means all those interest rate risks I’ve been warning about are coming home to roost!

Look, I’ve been flagging the risks of investing in long-term bonds for a long time. They may have risen in value for the better part of last year, but that move is over.

It’s also worth pointing out: Yields on 2-year, 5-year, and 10-year notes never undercut the record low levels set in 2012-13 on the more recent pullback. So just as I said it back then, I’ll repeat it again now: I don’t think we’ll ever see those yields again in my lifetime.

The U.S. economy chugs along, with job creation leading the way.

That means you need to lock in long-term financing now if you’re shopping for something like a 30-year mortgage. If you’re looking for a safer way to invest in the fixed-income market, stick with ETFs or mutual funds that have a maturity or duration of two or three years, max.

When it comes to stocks, “bond-like” REITs and utilities are most vulnerable to price declines caused by rising long-term interest rates. If you want to generate income, zero in on some of my favorite alternatives instead. They would include MLPs or highly rated, dividend-paying stocks in other sectors besides the vulnerable ones I just cited. In fact, I’ve dedicated my entire next Safe Money issue to the topic.

Do you have any other favorite income-generating ideas? What do you think of the rout in bonds … is it going to continue and if so, what do you believe is driving it? Have you been dodging the carnage by following my recommendations? I’d love to hear from you on these topics over at the website.

Our Readers Speak

The burdens of borrowing money, the Iranian negotiations, and all things Greece were the subjects of conversation in the last 24 hours online.

Reader Gary offered these cautionary comments in light of what’s happening in Europe: “The way the U.S. prints money, we are not far behind. We’re in great need for financial stability. Maybe the next President will do better.”

Reader Steven shared this take as well: “It’s a truism that the cost of borrowing money adds to the amount to be repaid anywhere from 50% to 100% of the amount borrowed. Governments hope that their investment in the country will produce returns that will make the debt payment possible and feasible. However, this almost never happens.

“Sovereign defaults appear to be looming on the horizon. How will those who are holding the notes respond? How would you respond? You would want your money repaid with interest. But how would others respond to your demand for repayment when they realize that you the creditor are living off of the wealth they are working hard to generate?”

Meanwhile, on the topic of Iran, Reader Ted F. said: “Iran is well on the way to nuclear weapons. All they have to do is string Obama and Kerry along long enough for the Russian missiles to show up, which would make it much more difficult for a pre-emptive strike at Iran’s nuclear infrastructure. With Obama’s and Kerry’s track record, that won’t be at all difficult.”

And Reader Steve said: “The Iranian negotiations should be chucked because they should never have gone on this far (with so many concessions) to begin with. Even the Arab neighbors of Iran dislike our negotiation stance, which may allow them to become a nuclear threat in the region very soon.”

Thanks for the observations. We’re up against some pretty important deadlines – or in reality, PAST those deadlines – when it comes to Greece and Iran. That means way or the other, resolution is coming.

Depending on what happens, that may merit some additional “buys” and “sells” in the days and weeks ahead. So make sure you pay attention to the emails and recommendations you receive as a subscriber to my services.

Other Developments of the Day

BulletAs health-care costs, government regulation and minimum wage levels rise in many parts of the country, companies are trying to cut corners to stiff workers, according to the Wall Street Journal. They’re using limited liability company and franchise structures, as well as fudging the lines between independent contractor/employee relationships to avoid overtime pay, taxes and other costs. In response, the government is getting more aggressive in cracking down.

BulletThe mega-merger trend hit the insurance industry today, with Ace Ltd. (ACE) agreeing to buy Chubb Corp. (CB, Weiss Ratings) for $28.3 billion. The cash-and-stock deal values Chubb at about $124 a share, a premium of 30% to where CB closed yesterday. It will give the combined firm an even bigger chunk of the global commercial, property, and liability insurance industry.

BulletI really enjoyed last night’s USA-Germany women’s World Cup match. The team did a great job pulling off a 2-0 win against the top-rated German squad, and that means they’ll face either Japan or England in the final on Sunday. Here’s hoping they bring home the top prize.

What are your thoughts about the job market here? Do you expect more mergers to help boost the value of your shares? Will you be watching soccer on Sunday night? Share your views over at the website when you can.

Until next time,

Mike Larson  

P.S. Did you know Dr. Martin Weiss designed his Ultimate Portfolio to identify longer-term corrections and bear markets quickly to help you move your money to safety? Click here to learn more about Dr. Weiss’ investment strategy!

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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