Headlines are trumpeting that the 30-year US Treasury Bond Yield topped 5%, while the 10-year yield hit 4.5%, on deficit concerns. Nice try. US debt has hit those levels because buyers are walking away as traders reprice risk. Here is one way to cope regardless, writes Keith Fitz-Gerald, editor of 5 With Fitz.
It’s something we’ve been talking about since last Sunday when I warned you very specifically about it, together with a downside test this week. Remember how the game is played. Highly leveraged traders – a.k.a. the big money – borrow boatloads of moola to magnify returns.
10-Year Treasury Note Index (^TNX)
When rates rise, the vigorish costs more so they sell: A) To reduce the risk of institutional-size margin calls by reducing their VaR (Value at Risk) and B) Because every dollar they'd otherwise fork over in interest to pay for their leverage costs more while also becoming a performance drag. Both of those reduce bonus potential.
What to do? Funny you should ask. I recently sat down for a wide-ranging interview with my colleague, the fabulous Scott “The Cow Guy” Shellady. He wanted to know how and why the spike in Japanese government bonds would impact investors here.
It’s not something that’s widely talked about because most financial advisors, frankly, haven’t got a clue how international markets work. But they probably should, IMHO. This really IS a bigger deal than people think, which is why smart investors will pay attention.
My investing tip: Low-beta, high dividend stocks are going to be your best friend if there’s some volatility ahead like I think might be the case. Hopefully you’ve got your shopping list ready.
