Mike’s Best “TIPS” for Coming Rate Hikes
Dear Wealth Watch Reader,
Fed rate hikes will impact your wealth this year. Unless you think “outside the box.”
Today I’ll arm you with a way to lock in great gains in the wake of rate hikes.
But before we move on…
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Now back to your Wealth Watch issue.
The Fed Decision That Will Spell 2018’s Fortunes
Have you been following interest rates?
If not, you darn well better be.
A sea change of is coming for interest rates and it’s going to affect everything from mortgage rates and auto loans to your investment portfolio.
The bond market enjoyed a nice 35-year long bull market, but 2018’s been painful.
The 10-year Treasury bond started the year at 2.43% yield. Ever since we’ve inched precariously closer to punching above 3%.
And as the chart below shows, interest rates have risen across all maturities. In fact, the longer the maturity the worse the loss.
The fund with the longest-dated bonds, the iShares 20+ Year Treasury Bond ETF (TLT), has lost 6.5% of its value in just over two months!
At that pace, TLT investors would lose more than 40% for the year!
Here’s how the rest stack up in comparison.
- iShares 10-20 year Treasury Bond ETF (TLH) is only slightly better, losing 4.1%
- iShares 7-10 year Treasury Bond ETF (IEF) is down 3.1%
- iShares 3-7 year Treasury Bond ETF (IEI) has lost 1.7% of its value.
So much for bonds being safe!
Despite this, bond investors could be making money instead of losing it. If they invested in the right kind of U.S. Treasury bonds.
Billions of dollars in “smart money” is flowing into one specialized part of the bond market that benefits from higher interest rates.
I’m talking about Treasury Inflation-Protected Securities (TIPS).
In the month of February, investors poured so much money into TIPS bonds that assets iShares TIPS ETF hit an all-time high of $25 billion.
TIPS bonds were created in 1997 to make it possible for investors to NOT lose money when inflation and interest rates moved higher. With TIPS, the value of your bonds actually rises when the Consumer Price Index goes up.
The ‘core’ Consumer Price Index, which excludes food and energy, showed a 0.2% increase from January and raised the three-month annualized gain to 3.1% according to Bloomberg.
As a result, TIPS have done very well. In fact, they’re almost the mirror image of iShares 20+ Year Treasury Bond ETF (TLT).
TIPS delivered a total return (appreciation plus interest) of 6% this year, according to the Bloomberg Barclays Indexes.
Of course timing is everything, but I see the clear end of the bond market’s 35-year run and a new era of rising interest rates.
And that is going to accelerate losses all across the bond market EXCEPT for super short-term Treasury bills and TIPS.
Right now is especially dangerous environment for income-focussed investors and retirees heavily invested in bonds.
Times are changing. Your strategies better too.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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