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A Big Opportunity In The Bond Market

By Investment UBondsSep 12, 2016 01:13AM ET
A Big Opportunity In The Bond Market
By Investment U   |  Sep 12, 2016 01:13AM ET
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Leave it to the government to screw things up. As the Zero Economy trudges forward, more and more distortions are rippling through the world of money.

You can thank the world’s money maestros. They’re desperate to fix all that is wrong, no matter the cost.

The question is... can you make money from what they’ve done?

Few answers are as simple. Yes.

As always, if you know the truth, there’s a shot to profit.

Around The Oxford Club (the publisher of Investment U), I’ve become known as the guy who loves to point a finger at the world’s central bankers. It’s an easy gig these days. As the maestros in charge of some quickly faltering economies, they’re making desperate moves.

They’re doing everything they can -- and plenty of things they shouldn’t -- to keep their respective economies growing.

Initiating negative interest rates is perhaps the most daunting move they’ve made... so far.

While we haven’t yet seen them here in the States (at least, if we keep inflation out of the equation), negative rates have become the norm in Europe.

And now the fascinating phenomenon has crept beyond sovereign debt. These days, even private companies are getting paid to borrow.

Once again, leave it up to the government to royally screw things up. This is not how things are meant to work.

But, alas, there is a profit opportunity.

Many investors were stunned to learn that several big-name companies in Europe are now selling bonds with current rates (the actual rate an investor will receive based on the price they paid) that are in negative territory.

Total just sold a series of bonds with a current rate of -0.19%...

The list continues... BP (LON:BP), Bay.Motoren Werke AG ST (DE:BMWG), Sanofi (PA:SASY) and Henkel & Co KGaA AG Pref (DE:HNKG) are all getting paid to borrow.

The first question nearly everyone asks when they hear these numbers is why? Why in the world would anybody invest in something they know will lose them money?

Ah... the very question is flawed.

There are many reasons these bonds are selling fast. Chief among them is the fact that, despite popular opinion, not everyone will lose money. In fact, most of the folks buying negative-yielding debt will make money.

Here’s the deal: Our oh-so-trusty governments have kicked off a war on cash. When you and I stuff our bank accounts with cash, we’re not spending it. We’re not making our political leaders look good by injecting our money into their economy.

That’s why they’re doing everything they can to make us want to spend that cash... including charging folks to keep their money in the bank.

Now, it’s vital to know that most retail investors aren’t getting charged. At least not yet. They will.

For now, it’s the big guys -- the big investment banks, insurers and pension funds -- that have hoards of cash. They’re not seeing many grand investment opportunities, and they’re scared of a faltering economy. So they’re not eager to invest their money.

But the government is eager to prod them along.

So they’ve “incentivized” them to do something with all that cash. That’s why - pay attention here - governments have entered the same markets these institutions rely on to protect their cash. It jacks up the prices and forces the big money to look elsewhere.

It’s that idea that makes all this negative interest rate talk profitable.

It’s the famed “Greater Fools” theory at work... and this time, the government is the greatest fool.

Let me explain.

The European Central Bank has pledged to continue buying European corporate bonds on the open market through at least March of next year. After that, many experts think it will not only increase its bond buying, but also make a big leap into the equities market.

As you may have come to understand, governments aren’t all that great at making discerning purchases. They tend to buy no matter the price. That’s certainly what we’re seeing in the European bond market.

Prices of bonds are going up, and yields are going down.

Falling European Bond Yields
Falling European Bond Yields

But this sort of price action is nothing new. It’s the Greater Fool theory at work -- as long as there’s another fool to sell your investment to, there’s a profit to be made. We saw it during the tech boom of the ‘90s, the real estate boom a decade later, and now it’s in the world’s debt market.

This time, the greatest fools of them all are central bankers. They’re playing with nobody’s money. It’s all freshly printed - straight out of thin air. They’ll gladly buy your bonds.

Knowing this, the bond market offers one of the most appealing short-term investment opportunities out there.

Yes, I have no doubt it will all come tumbling down in a mess like we’ve never seen before. But that’s years out (governments are quite good at pushing off the inevitable). In the meantime, bond prices will continue to rise, and rates will continue to fall.

I’m sure of it.

It’s not the interest rate you should go after or care about. It’s the rising price.

As Europe and, soon enough, its central bank brethren across the world push debt prices higher, folks who are buying now will end up with tidy profits as they sell to the next fool in line.

You can thank the government... the greatest fool of them all.

A Big Opportunity In The Bond Market

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A Big Opportunity In The Bond Market

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