 | | The Truth About This Inverted Yield Curve | | Karim Rahemtulla, Options Strategist, The Oxford Club | Virginia Stock-Picking Millionaire Stuns Audience With Revelation in "TEK Talk"
"He recommended the craziest, most harebrained, most out-of-his-mind idea... and it worked. Unbelievable!"
See for yourself in his free "TEK Talk" here. | | | Editor's Note: In today's piece, Karim explains the significance of our inverted yield curve.
For everyday investors, this phenomenon could be a sign that fixed-income investments like Treasurys will offer lower returns in the future.
However, many of us rely on consistent income from government bonds to bolster our portfolios. As the yield curve inverts further, these investors' retirements could be at risk.
But not all bonds are created equal... Bond Strategist Steve McDonald knows how important it is for fixed income to deliver when investors are counting on it. Through his bond trading service, Oxford Bond Advantage, Steve encourages investors to shift into corporate bonds, which are based more on company fundamentals than interest rate movements and yield curve panic.
Steve argues that corporate bonds are the ticket to grow your retirement savings up to 154% this year... without a single stock.
To learn more about how to avoid the disappointment this inverted yield curve could cause, click here. Then, read on below to discover more strategies for beating this latest trick pitch from the Fed.
- Mable Buchanan, Assistant Managing Editor
The Fed has pitched us a tough one...
The news is abuzz with talk of the inverted yield curve. Many investors are wondering: What is it? What does it mean for me? And could it be misleading this time?
Understanding the Yield Curve
First, let's talk about the yield curve. When the yield curve is behaving normally, you'll earn more on long-term government bonds than on short-term ones. | | | So if you were to buy a 10-year government bond, it would pay you a higher rate of interest than a bond that matured in two years.
This makes sense. After all, you should get paid more for taking more risk.
In this case, the risk is tying up your money for 10 years rather than for two years. You are banking on the idea that the economy will be stronger over time and not weaker.
The yield curve is now inverted. That means you will make more money from the two-year bond than from the 10-year bond.
This implies that the economy will be weaker in the years ahead, as you are now getting paid less money to lock up your money for the long term.
Learning From Yield Curve Trends
In the past, whenever the yield curve has inverted, a recession has followed within a year or two.
What this means for you is that your money will earn less from fixed income going forward. This also happened during the period after the Great Recession. At that time, the Federal Reserve took rates down to next to nothing to stimulate the economy.
So you must prepare yourself to earn less income from your low-risk investments like certificates of deposit (CDs) and Treasurys. You should also shift into high-quality dividend-paying stocks that you plan on holding, not trading.
After all, the dividend yield on the S&P 500 is now higher than the yield on the 30-year Treasury for the first time since 2009.
There are a lot of reasons that the yield curve could have inverted. For example, we've begun to see lack of confidence in global economic growth. This is due in part to trade wars, Brexit, and slower growth in countries in Asia and Europe.
The U.S. economy is the shining star for now, but growth in the U.S. is at risk due to the massive amount of political uncertainty that is emanating from Washington.
Everyone hates uncertainty - investors, the general noninvesting public and the markets alike. We hate it because it makes us pull back from investing and from spending and creates a slower growth environment.
That is bad for everyone. | | | Joint Pain? Back Pain? What Hurts?
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The only saving grace that I see this time is that the inversion is very mild right now and may be caused by unique external factors - not trends we've seen before.
(Of course, I'll couch this by admitting that it's never a good idea to say, "It's different this time." Usually, it isn't! But it is possible that we are experiencing a special situation.)
Wood-knocking aside, one factor worth watching is the behavior of interest rates around the world. For the most part, the rates in Europe are negative. This means that people are paying their banks or governments to hold their money instead of the other way around.
That forces people to invest outside these countries in search of positive returns - which puts the U.S. in the crosshairs. We have a strong currency, and we are paying positive yields on cash.
Investors in other countries are plowing money into long-term Treasurys to lock in yields, no matter how paltry... it's better than losing money.
Today, that creates a situation where there is a lot of demand for the long bond. That's why the yield is sinking lower and the price is rising higher. That creates added pressure, inverting the yield curve.
How to Hit a Home Run
Therefore, while it's true that the yield curve normally signals a recession ahead, it may not be as accurate this time. And remember, a recession means growth is slowing. It doesn't always mean that growth is negative.
The U.S. economy is in great shape right now. Don't let panic-ridden headlines keep you from stepping up to bat - with the right investments, you can still score.
Just keep an eye on Washington... it's doing its best to make you strike out.
Good investing,
Karim
P.S. If today's inverted yield curve does foretell a recession, the individual investor is likely to lose money by investing in the wrong bonds and suffering their low returns.
To ensure that you continue to receive competitive returns from fixed income, take a look at Steve McDonald's plan for taking advantage of "superbonds." These bonds create legally guaranteed returns regardless of what happens to our economy.
When even fixed income comes under fire, it pays to trust the experts. Click here to learn more about Steve's plan for knocking even the Fed's trickiest pitches out of the park. | | | | | | Free Book Reveals the Next Big Thing in Alternative Cancer Treatments
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The Oxford Club is a financial publisher that does not offer any personal financial advice or advocate the purchase or sale of any security or investment for any specific individual. Members should be aware that although our track record is highly rated by an independent analysis and has been legally reviewed, investment markets have inherent risks and there can be no guarantee of future profits. The stated returns may also include option trades. 
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