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Boca Raton, May.21, hot stocks .- It isn't easy getting up every day to fight the Fed and just about every other central bank in the developed world. But that's exactly what retired and conservative investors face every day.
The Fed has been having a money printing party, trying to force buyers out of fixed income and bonds, and into stocks and real estate. The result has been a market where the 30-year Treasury bond pays less than half of what it should.
Bond yields have gotten so low it's laughable.
But the yield crunch isn't just here at home. Bonds from African nations that in a normal market would pay 10% to 18% are paying 6% to 7%.
They aren't worth the risk.
Japan got on the money-printing, devaluation ride last fall. It has been great for its stock market and will eventually get it out of its 20-year slump, but it isn't doing anything for bond yields.
The EU lowered its benchmark rate to 0.5%. They too are trying everything to get some inflation and growth going.
Here at home the Fed's QE - which is a fancy word for printing money - has no end in sight.
Some experts think it could go on for as many as two to six more years. I know I don't have to tell you what this has done to yields on savings, money markets and bonds of all types.
Washington will run out of paper before it is forced to stop the presses.
Countries across the developed world are in a race to devalue their currencies, get some inflation going, and try to get growth numbers above the barely measurable range. Until they do, don't expect any easy pickings in income investments.
But that doesn't mean there aren't any good options left...
Hidden Gems in a Rough Market
You can still make a lot of money in certain types of bonds. But there's a catch.
If you want to outpace inflation, you must look for out-of-favor bonds of all types. Unfortunately, most people are lousy bargain shoppers when it comes to stocks and bonds.
But, if you can train yourself to shop for bargains, there are:
- Corporate bonds from companies that have had a bad run for temporary reasons.
- Quality municipal bonds from cities or states that have been thrown out with the bath water.
- Even foreign bonds in countries with bad debt reputations that have improving credit quality.
Earn Over 7% for the Next Seven Years
Consider a bond from one of the old stalwarts of the tech world, Advanced Micro Devices (NYSE: AMD). Here's a perfect example of a company that was in a real funk. It was considered a dinosaur of the business.
AMD's old business model tied it to PCs, which we all know are going the way of mimeograph machines and flip phones. The market had all but written off AMD and many other big-name, PC-related businesses, such as Cisco (Nasdaq: CSCO), IBM (NYSE: IBM) and HP (NYSE: HPQ).
An AMD bond sat in the centralized bond inventories for months at a big discount, and no one would touch it. The yield was above 10% a year, but it was treated like a leper.
Here's what the numbers for the bond looked like as little as three months ago.
The AMD bond (CUSIP 007903au1) with a coupon of 7.75% that matured in August 2020 was priced at about $920. Its minimum expected annual return was about 10.5% a year.
It was a 10.5% bond... and they couldn't give it away.
But then the news shifted in favor of AMD. Suddenly AMD is the favorite of the market and the bond has run up in price to around par or $1,000.
The good news is you can still buy it. It pays a little less than it did before it was reborn by the good news. But it's still a very short maturity - around seven years - which will hold up well when rates turn around and the bond market sells off. It will pay almost four times what the 10-year Treasury is paying.
And AMD's future looks very bright...
With the price around $1,000, we would receive the coupon rate each year until maturity. That's two payments a year of $38.75, or an annual return of 7.75%.
It would have been nice to get the 10.5% yield when it was priced at $920, but 7.75% in this market is nothing to sneeze at. And I expect the price of this bond to continue to tick higher as AMD's numbers improve.
Beat the Bankers
You can beat the central banks at their game, but you will have to become a bargain shopper to do it.
The choice is yours...
Become a bargain hunter or learn to live on a 3% yield on your money. ...
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