By: Costas Bocelli — October 8, 2020
Don’t Let Uncle Sam Screw You Over Anymore!
If you’re an investor in search of income, that’s the stone cold reality for today -- and for the foreseeable future, as well.
Just have a look at the yield investors are fetching for Uncle Sam’s finest paper.
(Click any image to enlarge)
Today, the yield on a U.S. 10-Year Treasury bond is 0.78%
That’s far below the rate of inflation.
The government’s preferred measure of inflation -- Core Personal Consumption Expenditures -- tells us that inflation is running at a 1.6% annualized rate.
But in the real world, price inflation is much higher for things that people need the most, like food, medicine, healthcare, and shelter.
Now that the economy has been rocked by the coronavirus pandemic, interest rates are at historic lows.
In the graphic above, we can see the U.S. 10-Year Treasury bond has been in a trading range of 0.50% to 0.90% since March.
The 10-Year yield has actually been creeping higher over the past two weeks.
The 0.78% yield is the highest since June… yippee.
Think it’s going meaningfully higher?
Don’t count on it!
Because the Federal Reserve is hell bent on keeping interest rates lower for longer.
The Fed can easily control short-term rates by setting the Fed Funds rate -- the interbank lending rate -- and what it pays on excess reserves to its member banks.
Currently, short-term rates are zero-bound (0-.25%).
And the Fed has explicitly communicated its intention to keep it that way for a very long time.
The Fed’s latest projection has short-term rates staying at zero for at least the next three years.
Longer-term interest rates are a little bit trickier to control.
But the Fed can and has been doing plenty to artificially pressure longer-term yields lower and, in turn, screw over income-seeking investors.
It does this through buying and accumulating Treasury bonds, aka, quantitative easing.
And the Fed is buying a lot these days.
The Fed’s balance sheet is now over $7 trillion and it stands to go higher. The Fed has already signaled that its bond-buying program will continue at the current or greater pace as needed to support the economic recovery.
So you’d expect that if the 10-Year yield tries to break out above the trading range, the Fed will be in there aggressively buying bonds and pushing the yield back down.
Again, sticking it to income-seeking investors.
But the reality is that the Fed has no other choice, because the government needs to keep interest rates at rock-bottom levels.
You see, the U.S. government’s finances are a hot mess.
The liabilities on the balance sheet have been rising at an alarming rate ever since the credit crisis of 2008.
Trillion-dollar budget deficits have been the norm during the depths of the great recession.
But this year has been a crusher.
The fiscal year (2020) just ended and the budget deficit is to top $3.3 trillion due to the pandemic virus and economic shutdown.
The national debt held by the public now stands at $21 trillion.
So that means for the first time since the end of World War II, federal debt will exceed annual gross domestic product next year.
The government is also working on another stimulus package that could be worth upward of $1.6 trillion.
And here’s the thing…
The Treasury has to pay interest on the enormous pile of debt.
So it’s in the government’s best interest to keep interest rates lower for longer.
But this is nothing new.
In fact, income-oriented investors have been getting screwed for years, if not for decades.
Here’s another chart on the U.S. 10-Year Treasury bond yields, only this one goes back 25 years (to 1995).
Do you see a trend in the yield of longer-dated Treasury bonds?
Of course, it’s clearly DOWN.
And based on the dire state of the government’s financial health, it’s likely to remain so for a very, very long time.
Heck, we could even see negative-yielding interest rates one day, like we find in the European sovereign bond complex.
So for those investors who are reliant on a steady source of income... it’s only getting harder and harder to find relatively high yields.
Fortunately, there are alternatives for investors who seek higher-yielding returns in today’s market environment.
Income-oriented investors can look to U.S. Equities.
It’s a great time to be in U.S. Equities, as it’s the highest rated in terms of relative strength among the six major broad asset classes.
Many dividend-paying stocks generate returns higher than what you can earn through traditional fixed-income vehicles, such as CDs, money markets, and Treasury bonds.
Take the S&P 500 Index, the large-cap primary benchmark for U.S. Equities.
There are currently 315 stocks within this index that are yielding more than 1% annually.
And there are 204 stocks that yield more than 2% annually, or nearly triple the returns of a U.S. 10-Year Treasury bond.
In other words, income-oriented investors can construct a high-yielding portfolio by targeting a selection of U.S. stocks.
And if constructed properly, it can generate steady, reliable income month after month. If you focus on the rights ones, there’s also the potential for long-term capital appreciation on the income-generating assets.
In next week’s column, I’m going to show you how to construct an income-oriented portfolio that will generate income each and every month.
And you can do it by buying and holding as few as three stocks.
So if you're just getting started, it’s very easy to construct an income-generating portfolio.
Next week’s column is one that you won't want to miss -- especially when I reveal this income-generating strategy and three high-quality investment ideas.
I’ll see you next Thursday!