Trump’s ‘Make America Great’ plan is bad news for these investors
From Teeka Tiwari, Editor, The Palm Beach Letter:
President Trump is about to embark on the boldest public spending spree since Roosevelt’s New Deal…
That’s good news for ordinary Americans. Trump is following through on his pledge to make America great again.
And it’s great for the stock market, too, as billions flow into companies that help build roads, bridges, and airports.
But for every winner, there’s a loser. And in this case, the losers will be bondholders.
You see, Trump wants to spend at least $1 trillion on infrastructure.
(Roosevelt’s New Deal cost about $50 billion in the 1930s and resulted in enormous deficit spending. It was funded by tax increases and borrowing. Trump plans to boost infrastructure spending while cutting corporate and personal income taxes.)
Like I said, these policies are great for the stock market… but they’ll require massive government borrowing.
Analysts estimate the president’s agenda would add $9.4 trillion to the national debt over the next decade.
Here’s why that’s really bad news for bondholders…
As the government borrows more and more, interest rates go up and up. Bond prices move in the opposite direction of interest rates. So they will go down and down.
If you’re relying on bond income to fund your retirement, education, or medical bills, you should be prepared to look for alternatives as interest rates rise.
But don’t worry… I’ll suggest a couple of bond proxies that yield 3.48% but aren’t affected by interest rates. If you’re looking for safe income, you should consider them…
Why Every Bondholder Should Watch Interest Rates
Most folks may not realize this — but as interest rates go up, bond values go down. (We call this an “inverse” relationship.)
And it’s long-term bonds that are the most sensitive to rising rates.
Here’s an example…
If you bought a 30-year bond in September 2016, you would have paid $166. And your yield was a tiny 2.2%.
Since then, the rate on the 30-year Treasury has galloped 45% higher to 3.2%. In turn, the price of the 30-year Treasury has plummeted to $146.60.
That’s a 12% loss on what is supposed to be a 100% rock-solid, safe investment.
In fact, we’ve seen nine straight trading days of bond market losses. That’s the longest streak since 1974.
You can see the downtrend in bond prices in the chart below.
It shows the iShares 20+ Year Treasury Bond ETF (TLT). Its price has tumbled as interest rates have risen.
I’ve been warning about higher rates since 2014. (Back then, I called it “income extermination.”)
I said investors weren’t being properly compensated for the risks of holding long-term bonds. That’s why I’ve repeatedly recommended scrubbing your income portfolio clean of long-term bonds.
The bad news is bondholders will see even larger losses if Trump’s policies are enacted.
It’s simple supply and demand. More demand for money by the U.S. government will drive the price of money (interest rates) higher. And that will kill existing bondholders.
Think about this… The 200-year average for long-term rates is about 6%.
So if all we do is go back to that historic average, the 30-year bondholder from my example above would see their bond value drop by 40%.
The good news is you don’t need to rely on bonds to secure big income that’s safe from rising rates…
Finding Safe Income the Palm Beach Way
One technique we’ve been using to find safe alternatives to bonds at The Palm Beach Letter is to buy senior bank loans.
These are loans made to investment-grade companies and backed by the borrower’s assets. So long as the economy does well, these loans do well.
And even if the economy trips up, the collateral is more than enough to secure the loan.
The easiest way to get into this market is to use an ETF. There are lots of them.
Two you can consider are the Highland/iBoxx Senior Loan ETF (SNLN) and the PowerShares Senior Loan ETF (BKLN).
Both funds pay about 3.48% and are well regarded.
The real beauty of these things is that they have “rate reset” provisions.
That means the interest you receive goes up as rates go up. That is an awesome feature that will keep you safe while traditional bond investors get killed.
The fund we use in The Palm Beach Letter is a bit better. We’ve been in it since 2014, and it currently pays more than 6%. If you’re a PBL subscriber, you can read about it here.
Let the Game Come to You!
Crux note: There’s another safe way to produce income outside the bond bubble. It’s a little-known account that’s tax-free and pays 37 times more than bank accounts. And you don’t need to report it to the IRS. To learn more about this click here.