A Solution to America’s Low Yield Environment

The smart money, aka Wall Street, typically sets the tone in the market, leaving retail investors a step behind.

At the beginning of August, however, retail investors tried to beat smart money to the punch by exiting high-yielding bonds first, causing the price to decline rapidly.

But Wall Street wasn’t going to let that happen. Instead of hitting the exits and being a day late to the selloff, the big institutions kicked off their own rally and bought up high-yielding bonds. Institutional players poured $650 million into the junk bond market in just one week, ending a month of outflows.

There is much more to this than just “buying the dip.” It actually speaks to what I have been telling you about over the last few months … low interest rates are here to stay.

The primary reason retail investors were getting jittery over their junk bond holdings is the inevitable interest-rate rise that is coming down the pike from the Fed as early as next year. Higher rates will send many traders rushing into higher rated bonds because of their improved yield and attractive security in comparison to junk bonds. As a result, junk bonds would then suffer a sharp selloff, crushing the value of the junk bonds anyone might still be holding.

But that’s where they had a fundamental lapse in judgment. Yes, the Fed will raise rates at some point from these historic lows, but the extent of that rise will be practically irrelevant until mid-2016 or later.

The Disappointing Rate-Hike Cycle

This goes back to several points I and our investment director Jeff Opdyke have touched on recently — the Fed simply cannot raise rates by any significant amount.

All the talk is on when the Fed will raise rates. But what investors and analysts should really focus on is how much the Fed will raise rates. If rates were at 3% by the end of 2015, that would be a significant move from today’s near 0%. But I believe interest rates will be barely off of 0%, and almost definitely below 1% by the end of 2015.

The United States simply can’t afford higher interest rates. The government’s interest payments on our $17 trillion debt would skyrocket. If rates were to revert to the Fed’s long-run average, our interest payments on this debt would nearly double, and that’s just assuming that we don’t accumulate more debt.

Rising interest rates alone can put our struggling housing market on the brink of collapse, while our country teeters on the edge of aneconomic collapse. And considering how reactionary our Fed is to the stock market, rising rates would cause investors to flee stocks, causing a market crash — something the Fed doves don’t want on their watch.

Even the Fed itself sees rates approaching only 2% in 2016 — and that is likely to be pushed back to 2017 or possibly even 2018 because of the factors listed above.

The Fed continues to find reasons to keep rates low. Whether it is current inflation, long-run inflation, unemployment or labor slack, our economy is not ready for increasing rates, according to Fed Chair Janet Yellen and the rest of her posse.

The bottom line is that the United States simply cannot afford for rates to rise significantly. Not only does this mean the hunt for yield is still on in equity markets, but for traditional income assets as well — such as Treasurys, CDs or money market accounts.

Junk bonds are fetching a yield of less than 6%. While that sounds attractive, remember this is junk-rated debt and tends to be extremely volatile, as demonstrated by the recent selloff. The 10-year Treasury Note is currently yielding 2.4%, but this too is vulnerable, like junk bonds, to the upcoming rise in interest rates and investors overreacting — failing to realize that as rates rise, the price of bonds and Treasury Notes declines, reducing your overall gains.

Most of your banking products, money market accounts and CDs are paying next to nothing, leaving you with few traditional places to collect income.  But we recently came across a product that is outpacing the national average money market account yield by more than ninefold.

A Yield That’s Over Nine Times the National Average

Trying to find just one good, decent yielding money market account can be challenging. Virtually every institution has reduced the yield to almost zero — the national average is just 0.11%. But that’s exactly why EverBank designed its unique Yield Pledge® Money Market Account. For first-time account holders, this account has a first-year annual percentage yield (APY) that is roughly nine times the national average for balances up to $50,000.

EverBank understands that yield will continue to play an important role for income seekers and that the opportunities out there are extremely limited — especially in these standard accounts that most institutions have reduced to a near-zero yield.

While we have a marketing agreement with EverBank, I recommend this product personally because I believe it’s a fundamentally sound way to grab higher yield given the current economic environment.

Regards,

Chad Shoop
Editor, Pure Income

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