Rising government debt. Exploding budget deficits. They have bond AND stock markets spooked. With rates on the rise, how can investors cope? Here are a trio of top strategies and picks favored by MoneyShow contributing experts.
Mike Larson MoneyShow.com
The “AAA Age” is over. Moody’s Ratings just stripped the US of its last top-notch credit rating, citing ballooning government debt and budget deficits (plus other factors). You can read more about what happened and why in my MoneyShow Market Minute column from this morning. Here, I want to talk about what it means for interest rates.
Check out the MoneyShow Chart of the Day – the CBOE 10-Year Treasury Note yield Index going back 12 months. TNX tracks the 10-year yield with a decimal place shift. In other words, a value of 44.41 equates to a yield of 4.441%.
You can see that yields have chopped around a lot in the past year. But in the shorter-term, TNX broke above the 50-day moving average AND minor overhead resistance at $44.
This chart doesn’t yet incorporate the further rise in yields today…and the close later will be important. If the $45 level gives way, it opens the door for a move to the January highs around $48 (a 4.8% yield).
If you’re trading bonds in any format – bond futures, futures options, or via Treasury ETFs like the iShares 7-10 Year Treasury Bond ETF (IEF) or iShares 20+ Year Treasury Bond ETF (TLT) – pay attention to these key levels. They could be ones to use as stop-out or trade-entry points, depending on what happens in the first one-two trading days after the Moody’s downgrade.
Bryan Perry Cash Machine
The lowering of the US credit rating by Moody’s, which essentially aligns its outlook with that of Standard & Poor’s and Fitch, was seen as an eventuality by market participants. Meanwhile, I continue to like Petrobras SA ADR (PBR)
Soon after the markets opened lower Monday, with the 10-year breaching 4.5% and the 30-year Treasury seeing 5%, the bond market caught a midday bid. Treasury Secretary Scott Bessent stated the Moody’s downgrade is a lagging indicator and that current policy directives aim to bring down the federal deficit.
Without much explanation or details as to what is the blueprint to slash the federal deficit, the market bought his response at face value. But I am highly skeptical of his position regarding this issue. Either he knows of a pool of endless money to buy the US Treasury auctions or there will be a shortage of buyers of US debt at some point.
As for PBR, it reported quarterly adjusted earnings of R$1.81 per share for the quarter ended March 31. That was lower than the same quarter last year, when the company reported EPS of R$1.85. Revenue rose 4.7% to R$123.30 billion from a year ago; analysts expected R$125.08 billion.
The mean earnings estimate of analysts has risen by about 9.4% in the last three months. In the last 30 days, there have been no negative revisions of earnings estimates. The current average analyst rating on the shares is “Buy.”
Recommended Action: Buy PBR.
Keith Fitz-Gerald 5 With Fitz
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.
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.
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.