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Investors may lose 40% in ‘safe’ bonds — and retirees are most vulnerable? Is this really true..... See below.
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The post-election rally so far has been a boon for stocks and a bust for bonds.
The yield on the 10-year Treasury TMUBMUSD10Y, +3.56% closed at about 2.20% on Wednesday, up sharply from its all-time closing low of 1.36% in July. Since bond prices fall when yields rise, anyone owning longer-term bonds has taken a big hit. In just two days after the election, for example, global bond markets lost a collective $1 trillion.
If more of the same is ahead over the next few years, many investors will be in a world of pain, especially retirees, who could suffer 2008-style losses — this time in “safe” bonds.
President-elect Donald Trump's son-in-law Jared Kushner is poised to play a powerful position in Trump's presidency — with or without an official White House post. WSJ's Shelby Holliday reports.
“The typical investor today has never experienced a sustained rising-rate environment and they are emotionally and historically unprepared for what happens when interest rates go up 3% or 5%,” he said in a telephone interview this week.
Millions of Americans, he observed, “are engaging in a variety of risky behaviors, often without knowing what they’re doing. They’re setting themselves up to lose a lot of money over the next several years, perhaps as much as they lost in 2008 in stocks.”
“You could see 20%, 30%, 40% losses in the bond market over the next several years,” he continued, “and the people who are most exposed to it are retirees trying to live on their income. The people who are the least able to handle it financially are the ones most likely to suffer.”
Much of this is because of the financial crisis and the Great Recession, when the Federal Reserve dropped interest rates near zero and it and other central banks unleashed torrents of money to get the economy moving. The result was only a half-decent recovery. Job growth has been OK, but wages have just begun showing signs of life. With a shaky global economy, Fed Chairwoman Janet Yellen has been reluctant to hike short-term rates.
As a result, retirees have earned zilch from really safe CDs and money market funds, so they’ve turned to the bond market, where we’ve probably seen the biggest scramble for return and yield in recorded history.
Problem is, while people think they’re being prudent by avoiding stocks, they are actually taking on more risk piling into bonds.
“People who are desperate for income are buying riskier and riskier bonds,” Edelman explained. “They’re buying long-term bonds, because 30-year bonds pay higher interest rates than three-year bonds, and they’re buying bonds of issuers that have shaky financials.”
“What these folks don’t realize is that as interest rates go up, the value of bonds goes down and as company performance weakens, their ratings go down and as ratings go down, the value of the bond goes down. Very often, it’s a double whammy.”
In general, the longer a bond’s maturity, the greater is its sensitivity to interest rates. So, when rates fall, a 30-year Treasury bond will gain more in price than, say, a 10-year note.
The opposite happens when rates rise. So, investors who “went long” in search of higher yields would be hit hard if rates suddenly rise. The capital losses they’d suffer from a bond’s plunging value could easily outweigh the higher yields they’ll get.
Even worse, people have plunged into high-yield bonds, emerging-market debt, and other risky fixed-income products that carry credit risk along with interest-rate risk. With $1.6 trillion in U.S. high yield bonds and $25 trillion in emerging-market corporate debt, rising default rates could wreak havoc.
Once rates really start rising, “we will see more investment losses than we have ever seen, partly because many Americans own these bonds either directly or indirectly — either through their pension funds or their retirement accounts at work—and more people own bonds than own stocks…It is clearly something that is going to affect every household that owns assets in this country.”
The good news is you can do something. Selling longer-dated bonds when the market bounces back and replacing them with intermediate-term bonds (in every category you own. Also, sell high-yield and emerging-market bonds the day before yesterday.
Maybe its wise not to load up on stocks, but don’t be afraid of them, either. A broadly diversified portfolio is your best defense if the market hits the fan, which may happen sooner than we think.
We have our overall outlook for pending 2017 period in the coming newsletter
You can grab a FREE 14 Day Trial to Our newsletter here.
FOR MORE INFO & UPDATES.......==> Join Our VIP ELITE GROUP -- FREE!
.[[ CONTACT US - 24 Hour Support Staff - Click Here ]]
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Investors may lose 40% in ‘safe’ bonds — and retirees are most vulnerable
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| Investors may lose 40% in ‘safe’ bonds — and retirees are most vulnerable |
"Investors may lose 40% in ‘safe’ bonds — and retirees are most vulnerable"
------------------------------
The post-election rally so far has been a boon for stocks and a bust for bonds.
The yield on the 10-year Treasury TMUBMUSD10Y, +3.56% closed at about 2.20% on Wednesday, up sharply from its all-time closing low of 1.36% in July. Since bond prices fall when yields rise, anyone owning longer-term bonds has taken a big hit. In just two days after the election, for example, global bond markets lost a collective $1 trillion.
If more of the same is ahead over the next few years, many investors will be in a world of pain, especially retirees, who could suffer 2008-style losses — this time in “safe” bonds.
President-elect Donald Trump's son-in-law Jared Kushner is poised to play a powerful position in Trump's presidency — with or without an official White House post. WSJ's Shelby Holliday reports.
“The typical investor today has never experienced a sustained rising-rate environment and they are emotionally and historically unprepared for what happens when interest rates go up 3% or 5%,” he said in a telephone interview this week.
Millions of Americans, he observed, “are engaging in a variety of risky behaviors, often without knowing what they’re doing. They’re setting themselves up to lose a lot of money over the next several years, perhaps as much as they lost in 2008 in stocks.”
“You could see 20%, 30%, 40% losses in the bond market over the next several years,” he continued, “and the people who are most exposed to it are retirees trying to live on their income. The people who are the least able to handle it financially are the ones most likely to suffer.”
Much of this is because of the financial crisis and the Great Recession, when the Federal Reserve dropped interest rates near zero and it and other central banks unleashed torrents of money to get the economy moving. The result was only a half-decent recovery. Job growth has been OK, but wages have just begun showing signs of life. With a shaky global economy, Fed Chairwoman Janet Yellen has been reluctant to hike short-term rates.
As a result, retirees have earned zilch from really safe CDs and money market funds, so they’ve turned to the bond market, where we’ve probably seen the biggest scramble for return and yield in recorded history.
Problem is, while people think they’re being prudent by avoiding stocks, they are actually taking on more risk piling into bonds.
“People who are desperate for income are buying riskier and riskier bonds,” Edelman explained. “They’re buying long-term bonds, because 30-year bonds pay higher interest rates than three-year bonds, and they’re buying bonds of issuers that have shaky financials.”
“What these folks don’t realize is that as interest rates go up, the value of bonds goes down and as company performance weakens, their ratings go down and as ratings go down, the value of the bond goes down. Very often, it’s a double whammy.”
In general, the longer a bond’s maturity, the greater is its sensitivity to interest rates. So, when rates fall, a 30-year Treasury bond will gain more in price than, say, a 10-year note.
The opposite happens when rates rise. So, investors who “went long” in search of higher yields would be hit hard if rates suddenly rise. The capital losses they’d suffer from a bond’s plunging value could easily outweigh the higher yields they’ll get.
Even worse, people have plunged into high-yield bonds, emerging-market debt, and other risky fixed-income products that carry credit risk along with interest-rate risk. With $1.6 trillion in U.S. high yield bonds and $25 trillion in emerging-market corporate debt, rising default rates could wreak havoc.
Once rates really start rising, “we will see more investment losses than we have ever seen, partly because many Americans own these bonds either directly or indirectly — either through their pension funds or their retirement accounts at work—and more people own bonds than own stocks…It is clearly something that is going to affect every household that owns assets in this country.”
The good news is you can do something. Selling longer-dated bonds when the market bounces back and replacing them with intermediate-term bonds (in every category you own. Also, sell high-yield and emerging-market bonds the day before yesterday.
Maybe its wise not to load up on stocks, but don’t be afraid of them, either. A broadly diversified portfolio is your best defense if the market hits the fan, which may happen sooner than we think.
We have our overall outlook for pending 2017 period in the coming newsletter
You can grab a FREE 14 Day Trial to Our newsletter here.
More updates coming please stay tuned
FOR MORE INFO & UPDATES.......==> Join Our VIP ELITE GROUP -- FREE!
.[[ CONTACT US - 24 Hour Support Staff - Click Here ]]
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