Washington Has 4 Ways to Lower Rates (It's Using None)
Summary
Brian explains the current volatility in the bond market by breaking down the inverse relationship between interest rates and bond prices. Brian notes that when the government sells a bond for 52 cents on the dollar, it is not a 'garage sale' but a mathematical adjustment to ensure older, lower-interest bonds yield the same as new bonds issued at current 5%+ rates. Brian highlights that many regular investors are unknowingly involved in this market through target-date 401k funds, which often hold up to 40% in bonds.
Brian outlines four possible future scenarios for the economy:
1. A weakening jobs report that forces the Fed to stop hiking, causing bond funds to rally.
2. Failed Treasury auctions where buyers demand even higher rates, hurting borrowers further.
3. Continued Fed hikes that eventually 'break' the economy, leading to a peak in long-term rates.
4. Japan, the largest foreign lender to the US, withdrawing its capital, which would spike US rates and weaken the dollar.
Brian emphasizes that individuals should identify if they are 'payers' (those borrowing at new high rates) or 'collectors' (those who locked in low mortgage rates or are buying new 5% yield bonds). Brian mentions that 30-year government bonds paying over 5% are historically a strong bet, as inflation has rarely stayed above that level over 30-year spans since 1913.
Mentioned Stocks
Reasoning: Brian observes that Google's borrowing costs rose significantly from 5.75% to 6.5% in just six months. Brian explains that while half of this increase is due to rising Treasury rates, the other half stems from lenders charging Google a higher risk premium because the company is spending $200 billion annually on data centers. Brian uses this as an example of how even the strongest companies are now being scrutinized more heavily by lenders.
Reasoning: Brian mentions gold as a potential beneficiary in his fourth economic scenario. Brian states that if Japan stops lending to the US and domestic interest rates spike while the dollar weakens, those holding gold would likely 'collect' or profit from the resulting market shift.
Reasoning: Brian views the current 5% yield on long-term government bonds as a historically attractive entry point for those in the 'collecting' column. Brian points out that since 1913, inflation has beaten a 5% return in fewer than one out of every twelve 30-year periods. Brian suggests that for patient investors who hold to maturity, these bonds offer a reliable way to stay ahead of inflation compared to cash.