sbayram/E+ via Getty Images Billionaire and world-renowned investor Ray Dalio recently stated that buying bonds ( TLT )( AGG )( BND ) is “stupid” as the global bond market is in a “bubble” with the world “substantially overweighted in bonds…at the same time that governments are producing enormous amounts of more debt.”
Governments are more heavily indebted than ever before after spending enormous sums to bail out and stimulate their economies in the wake of the Great Financial Crisis and Recession of 2008-2009, taking advantage of a subsequent decade of easy money and historically low interest rates, and then taking on even more debt to tackle the challenges posed by COVID-19. Today, as we begin to move past the pandemic, governments are showing no signs of slowing their spending, as heavy investments in improving essential infrastructure and technological capabilities as well as a growing arms race across Europe, the Middle East, and Asia are driving government budgets to new heights.
Meanwhile, corporations and households have also taken on record levels of debt, fueled by cheap interest rates. Businesses have capitalized on cheap debt to buy back incredible amounts of stock over the past decade, leaving their balance sheets bloated with debt. Individuals have also joined the cheap debt party, using it to finance purchases of increasingly pricey real estate, vehicles, and higher education.
While this party lasted as long as inflation was kept in check by rapid technological advances and relative global geopolitical stability, the pandemic and subsequent war in Ukraine have upended that order. Today, we have soaring inflation levels that we haven’t seen in four decades, proving the current interest rate status quo untenable. Central bankers and other monetary policymakers have conceded that higher rates are coming very soon. As a result, what was once a goldilocks scenario for bond investors and borrowers over the past decade – where extremely low interest rates made borrowing easy and steadily declining interest rates pushed bond valuations higher for investors – has now turned into a perfect storm.
Inflation is eroding the purchasing power of bonds’ principal while increasing interest rates will erode their market value. This one-two punch will severely harm the wealth of investors buying bonds today thanks to persistently low real interest rates. As this realization sets in over the coming months and years, it could quickly escalate to the point where the bond bubble pops and bond prices crash, thereby sending interest rates soaring. As Dalio said:
“If bond prices fall significantly, that will produce significant losses for holders of them, which could encourage more selling.”
This, in turn, would make it increasingly difficult for heavily indebted corporations and governments to refinance their debt as it matures, potentially leading to broader challenges for the global economy.
While this is clearly a message of gloom and doom, particularly for retirees looking for safe and reliable income investments from traditional sources like bonds, there is hope. In this article, we outline 5 safe havens that offer higher yields than most bonds today and are in much better position to weather the storm of soaring inflation and rising interest rates. #1. Virtu Financial ( VIRT )
A high-frequency trading technology company, VIRT benefits from soaring market volatility. This is because when market volatility increases, it increases demand for VIRT’s services and also the desire to transact securities quickly leads to wider bid-ask spreads. As a result, VIRT benefits from the combination of increased volumes and increased profit margins. In fact, VIRT’s greatest periods of profitability have been during the last two great market crashes (2008-2009 and 2020).
With a current dividend yield of ~3% that is covered very well by earnings and is supplemented by a very aggressive share buyback program, VIRT is essentially portfolio crash insurance that pays a dividend yield greater than many bonds today, buys back shares, and pursues high return on invested capital organic and inorganic growth opportunities. Our investment in VIRT thus far has generated hefty returns and has played a significant role in driving our portfolio value higher over the past few months, despite the broader market declining meaningfully. If/when the bond market crash comes, VIRT will likely profit immensely. #2. W. P. Carey ( WPC )
WPC is another safe haven that offers a very attractive yield well north of 5% and has raised its dividend every year for nearly a quarter century. As a net lease REIT, its cash flows are backed by decades long low-risk leases of mission critical properties to high quality tenants. The majority of its […]
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