Money

Bonds Are the Place to Be Right Now

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Last week, Sen. Elizabeth Warren asked Fed Chair Jerome Powell to reduce the “astronomical rates.”

I’m not sure which planet she’s on, but I know it’s not the one that’s between Venus and Mars.

I get it. It’s an election year, housing is extremely expensive these days and Warren historically fights for disenfranchised consumers who can’t afford housing.

But let’s put rates in context.

This is a chart of the federal funds rate over the past 70 years. Do our current rates really look astronomical?

Chart: Interest Rates Far Below Historical Highs

The historical average is 5.42%, and the current range is 5.25% to 5.50%. So we’re right in line with where we’ve been historically.

Furthermore, there were 9 million job openings in December, up from 8.9 million in November. Prior to the pandemic, there had never been 8 million jobs available in a month.

In January, employers added 353,000 jobs. That’s a big number, and it’s an increase from December’s 333,000. Wages are also up 4.5% over last year.

And corporate earnings are expected to have grown 4.4% in the fourth quarter of 2023, while fourth quarter GDP was a robust 3.3%.

So we’re not exactly teetering on the brink of a recession.

But rates could certainly change. As you can see in the chart above, big spikes have often been followed by quick moves lower, as the Fed has a habit of overdoing it both when it raises rates and when it lowers them. (This has actually created an exciting opportunity for us, though… stay tuned for more on that next week.)

To make matters worse, China is staring at a looming financial crisis. Chinese property developer Country Garden Holdings (OTC: CTRYF), one of the largest companies in the world, is selling off foreign assets as it tries to deal with roughly $36 billion in debt.

And another Chinese developer is in even worse shape. Evergrande, which has $300 billion in debt, was ordered by a court to liquidate its assets in order to pay creditors.

Should China’s woes make their way over to the U.S., the economy could hit the brakes and rates could in fact be lowered.

Either way, bonds are the place to be right now.

If the economy remains strong and rates stay stable, bondholders will continue to enjoy stronger yields than they’ve seen in years.

Investment-grade corporate bonds are yielding 6%. Non-investment-grade bonds rated BB or better are yielding more than 7%. (Remember, bondholders are guaranteed to get their money back at maturity unless the company goes bankrupt.)

And if rates fall as Warren wants, bond prices will rise and produce nice gains for bondholders, because bond prices move in the opposite direction of rates. In that scenario, investors could either take their profits or continue to collect a high rate of interest (which will look progressively better as rates move lower) until maturity.

I’ve been telling my subscribers to load up on bonds for a while now. It’s hard to imagine a better scenario for this investment class.

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