The Current Hysteria/Opportunity in The Bond Market

The specter of higher interest rates (in a booming economy and tight job market) has finally produced what Wall Street loves to refer to as a crisis in the Bond Market.

In "One Man's Bond Crisis is Another's Income Investment Opportunity", an article you should read again, I was trying to make it clear to income purpose investors that a bond crises for Wall Street professionals is most often is buying opportunity for investors.

  • "But we (the average investors out here) can simply reinvest our current CEF income in any number of portfolios of bonds, preferred stocks, loans, notes, etc., now selling at discounts, not only from their maturity value, but also from their combined Net Asset Values. Read that again (also), please."

  • "Isn't it great when Wall Street's pain becomes fuel for the small investor's gain.... but only if you take advantage of the lower price, higher yield scenario, that is staring you in the face as you read this message.."

In "Lower Prices Equal Higher Income", I pointed out that, even though the short term impact of perceived higher interest rates is lower prices for all existing income purpose securities, eventually, such higher rates will eventually be translated into higher dividend payments a year or two down the road.

But in the meantime, we can double the benefit of our income production (and new account deposits) by adding to positions we already hold, while they move down toward their lowest prices in over a year.

  • "The good news, and I mean extremely good news, is that the income produced by the securities inside the funds HAS NOT CHANGED... Neither your Working Capital nor your Base Income are impacted by lower market values."

  • "If you add to your CEF positions... selectively... every purchase will reduce the cost basis of each share you own, increase the current yield of each position added to, and increase the yield and total income of the entire portfolio."

In "Interest Rates Are Rising - The Sky Is Not Falling", well, why not have a look:

Once upon a time, in the dark ages of income investing, there were no closed end income funds (CEFs) ... whoa!

When interest rates were expected to rise, the market prices of all "interest rate sensitive" securities fell --- thus bringing their "effective yields" more in line with what "current" interest rates were expected to become.

Wall Street, always willing to help investors deal with perceived adversity, offered this sage advice: "Have no fear, we'll just sell your old securities (salivating at the thought of another 3% markup in the pocket) and buy new ones with shorter maturities --- they won't fluctuate as much with higher rate expectations."

Neither the relationship with interest rate expectations, nor the self-serving Wall Street solution has changed: mainstream, transaction driven, market value myopic, lower-price paranoid, Wall Street sales organizations just don't get it. Actually, I'm fairly certain that they do "get it"--- they just don't want you to.


"It" is the (apparently) much too simple income investing truth that more income is absolutely always better than less income and that higher market interest rates are the only force of nature that can make higher income levels possible.

"It" is the corollary "truth" that lower prices on existing income securities of all shapes, forms, qualities, and durations generally have no impact on either the borrowers' ability to make their payments, or the amount of the payments that are being made.

"It" is the still larger truth that, when dealing with higher quality (IGVSI) equities and most classes and categories of income purpose securities, lower prices have invariably been much more of an opportunity than an adversity --- particularly when in CEF form.

Until the mid-eighties or so, only well informed major investors could buy more of lower priced preferreds or huge corporate and municipal issues --- not an easy trick for the average investor to pull off. Thus, smaller income investors were easy "marks" for Wall Street fear mongers.

But with the advent of managed Closed End Income Funds, all the hype and fear should be gone. Now all of us can dance to the interest rate cycle symphony with pretty much the same level of enthusiasm as we "Shake, Shake, Shake" with the much more energetic gyrations of the Stock Market.

If you have any sense of market rhythm, either dance is pretty easy to master --- when you use your iPod and earphones to block the commercial, fear-inciting static from lower Manhattan and the sensational (sic) investment media.

Higher interest rates and lower brokerage statement market values, do not mean that the financial sky is falling --- quite the contrary. Higher interest rates should eventually translate into higher payouts to investors; higher market values will reappear when the investment gods reverse the cycle.

  • A wise man once said: when nearly every security of a particular type, sector, or class is down about the same amount, you are probably looking at a buying opportunity, particular when the level is at or near a 52-week low. Add to your holdings slowly and selectively.


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