Bonds Archives - CMG AdvisorCentral

Beware: Rising Rate Environment

Posted on 02.21.17 |

Reminder for bond investors: When interest rates rise, bonds lose value. I shared the following chart in July 2016 (interestingly just two days from the 1.37% low in yields). It shows how much money is lost for every 1% increase in rates. The top section is the 10-year Treasury bond and the bottom section is the 30-year Treasury. (I know I’ve shared this chart with you several times, but I believe it is worth revisiting. I just don’t believe the average investor knows just how much risk they are taking on with their so called “safe” investments.)

1.37% was the low yield back on July 13, 2016. The 10-year Treasury is currently yielding 2.42% and the 30-year is yielding 3.02%. That adds up to a -8.84% loss in value for the 10-year and call it a -16% for the 30-year. Maybe rates move back down, but I’m not so sure. I’m a bit more worried about what those losses will look like when yields rise to 3.4%, 4.4% and 5.4% (similar to where they were in 2007). -30% is a real risk.

Rising Inflation Pressures and What it Means to Your Bond Allocations

Posted on 02.06.17 |

Below is my “go to” inflation chart. The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures). High inflationary pressures are signaled when the model rises to +6 or above. Low inflationary pressures are indicated when the model falls to zero or less.

0203-13

Source: Ned Davis Research

Bonds, bond funds and bond ETFs lose money when rates rise. I posted this next chart just a few days before Treasury yields hit a 35-year yield low of 1.37%. What it shows is how much money is lost when rates rise.

If your starting point was a yield of 1.40% (top half of chart), as it was on 7/11/2016, and rates rose to 2.40% (which they did) your loss would be -8.84% if you were invested in 10-year Treasury Notes and -19.07% (bottom section of chart) if yields on the 30-year Treasury Bond rose to 3.25% (which it nearly did). Further, note the risk of loss if the 10-year rises to 5.40%. Note the -53.90% loss on the 30-year if yields rise to 6.25%.

A number of pundits are calling for a 5% yield in the 10-year within a few short years. I’m not in that camp but really… I don’t know. I’m more in the “one more big recession” camp that will properly reset equity valuations and if so then rates should gap lower.

What I do believe is most important, is that investors should see this chart and size up the potential risk-reward for themselves. With rates just coming off 5,000-year lows, my best advice is to think about your bond exposure as if your retirement wealth is dependent on it… and it is.

2.45% Treasury yields suck (as a good friend reminds me is a technical term) and rising inflation will eat into the net real yield and further cause interest rates to spike higher. Treasury yields were north of 5% in 2007.

Be tactical with your bond exposure. Don’t look at the last 35 years, as many people do, and project it forward. The great bond bull market yield low is likely in. Think differently about how you position that 40% of the traditional 60% equity / 40% bond portfolio.

Inflation Risk is High

Posted on 01.17.17 |

Monitoring inflation is critical since turning points in inflation often determine turning points in the financial markets.

The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures).
That data is plotted in red in the lower section of the chart.
High Inflationary Pressures are signaled when the model rises to +6 or above. Low Inflationary Pressures are indicated when the model falls to zero or less.
Current reading is “High Inflationary Pressures.”
Signals in the upper section – up and down arrows.
Correct signals 73% of the time. Pretty good historical record.

Source: Ned Davis Research (includes disclosure)

Rising inflation is bad for bond investors and generally bad for stocks but is bonds I worry about most today.

2017 Predictions

Posted on 01.17.17 |

I hate making predictions.

I got the tech wreck and sub-prime right, but was far too early on those predictions. Importantly, the predictions below could most certainly be wrong. We live in a highly complex world. We can measure instability, we can score up risk but we can’t precisely know timing.The clear risk to me today is in the bond market.

U.S. stocks will remain in an uptrend fueled by a strong dollar.
Tax cuts, infrastructure spending and $2 trillion in tax repatriation will drive capital flows to the U.S.
The European sovereign debt crisis will be the first major crack to crack. Unmanageable debt in Portugal, Italy, Greece and Spain. Include France and Germany in their dysfunctional union. Confidence in government/political leadership is lost.
The European banks sit on the fault line. Watch the banks. Hope so… Not so sure.
The smart money races out of EU banks to U.S. dollars and U.S. assets.
In China, debt too is the major concern. Ghost cities lacking rental income will prove unable to support the structured debt that financed the construction. Defaults mount.
Drastic measures are put in place to prevent the flow out capital to the U.S.
Gates, tariffs, currency wars escalate – trade wars escalate.
Loss of confidence in government here, there and most everywhere.
Global and U.S. inflation become a major concern as global growth remains well below the average of the last six post-recession expansions. Click here for a great chart.
Stagflation returns. Low growth/high inflation. Interest rates move higher with the 10-year touching 3% this year and 6% within a few short years.
The great bond bull market is over. Bond investors lose money.

The Bond Market is Facing a “Perfect Storm”

Posted on 01.09.17 |

I’ve been saying for some time that the biggest bubble of all bubbles is in the bond market. European sovereign debt might just be the first to crisis. Further, global debt has reached 325% of GDP. Academic studies show that economies get into trouble when debt-to-GDP exceeds 90%. Expand that to the U.S. and you’ll find a 105% debt-to-GDP number. (The number is actually much higher — 250% — if you include Social Security and Medicare debts.)

According to Paul Schmelzing, “The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967.”

Don’t despair… click below for ideas about what you can do with the fixed income portion of your portfolio.

The Quest for Yield

Posted on 10.10.16 |

Yields are at 5,000-year lows.

71% of the world’s government bonds are yielding less than 1%. 33% yield less than 0%. In a picture it looks like this:

Source: Bloomberg; JPMorgan Asset Management, BofA Merrill Lynch

Risk is being overlooked in HY bonds. Yields on high yield debt are close to the same yields on less risky loans. The chase for yield has driven investors to riskier asset classes.

I am anticipating a once-in-a-generation buying opportunity in HY bonds. While the trend this week is up, continue to invest with the trend. Move to the safety of cash or Treasury Bills when the trend crosses down.

Click below for a great chart showing what a 1% increase in interest rates does to bond prices. Show it to your clients!

Zweig Bond Model Signals What ETFs To Be In

Posted on 07.20.16 |

ETF.com As one of “the more influential ETF strategists in the money management industry” CMG Capital Management Group CEO Steve Blumenthal was invited to write a column for ETF.com about bond investing. Steve writes:

“Most analysts missed the great bond rally of the last two years. The Zweig bond model provides a disciplined, rules-based way that may help you better navigate and profit from the up and down trends in interest rates.

“I’ve long been a fan of the great Marty Zweig. In the mid-1980s, Marty and Ned Davis Research (NDR) created the Zweig bond model. Back then, the world was dealing with a rising interest rate environment. The 10-year yield peaked at 14% in 1984.”

See full story in ETF.com here.

Stocks and Bonds Have Little Juice Left

Posted on 06.05.16 |

CMG Capital Management Group Market Analysis Do you remember back in the early 80s when interest rates peaked at 15.25% and most everyone felt rates were moving higher, certainly not lower? The fact is, it was the single best time in history to get bullish on bonds.

Solomon Brothers’ head of research Henry Kaufman went from bond bear to bond bull and that call, unpopular as it was, later earned him “guru” status. The thing is, at that time, most people thought he was nuts.

Recall too that inflation was in the mid-teens and both stocks and bonds had burned investors over the prior decade. Fed Chairman Paul Volcker stood tall in his fight to rein in inflation. Kaufman’s bullish call went on deaf ears. Few seized the opportunity.

Bonds And Gold In Bullish Trend

Posted on 04.17.16 |

CMG Capital Management Group Inc. The CMG Managed HY Bond Program moved back to a buy signal early this week. Bonds (the Zweig Bond Model remains in a buy signal), emerging markets, even gold (gold remains in a buy signal below) are all moving higher.

Also notable last week: the 13-week Exponential Moving Average (EMA) line crossed above the longer-term 34-week EMA line. Trend followers smooth the historical price performance and, when a shorter-term trend line crossed above or below, it identifies a change in trend.

CMG NDR Large Cap Momentum Index