And Now For Something Completely Different: Negative Bond Yields

Treasury Inflation Protected Securities, or "TIPs", as they are popularly called, are U.S. Treasury Bonds that have a built-in mechanism to adjust returns for increases in the Consumer Price Index (CPI).  For a more detailed explanation on how they work, click here: http://markostake.blogspot.com/2009/12/tips-on-grabbing-higher-yields.html.

Yesterday, the U.S. Treasury sold $10 billion worth of TIPs which had a NEGATIVE cash yield of 55 basis points, or -.55%, with a 50 year maturity.  Huh?  How can yields be negative?  Does that mean that investors are so stupid that they would pay to lend money?  No, the adjustment feature as described in the piece linked above, adds to total return.  But, if the CPI were to come in at zero, then yes, investors would actually pay Uncle Sam for the privilege of lending him money.

Historically, cash yields on TIPs have tended to be in the positive 1-2% range.  Not today! 

So, what does this mean?  Investors are so worried about inflation eating away at their cash yields, that they will pay handsomely for inflation protection. 

What inflation?  Latest figures for the CPI have come in at a scant 1.1%.  That means that the total expected return for a TIP would be a positve .55% (the 1.1% inflation rate less the .55% negative cash yield).  Before you howl, keep in mind that the adjustment feature means that TIPs have the risk of  6 month Treasury Bills, which yield something on the order of .25%.  By comparison, a decent deal.

So, other than the fat half-percent yield, why should anyone buy these?  Simple, hyper-inflation is not only likely, it is inevitable.  Proof?  A falling dollar, an accelerating commodities market and most significant of all, the now snorting bull market in precious metals.  Oh, and let's not forget that none other than "Helicopter" Ben Bernanke's belief that inflation is TOO LOW! 

The only reason we have NOT yet seen the explosion in inflation is something called monetary velocity.  For a fuller explanation of this aspect of money supply, click here:  http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.

For investors, all roads lead to Gold, Silver and precious metals stocks.  While it appears that we are in the midst of a sharp correction, this will only be a minor bump on the road to MUCH higher prices.  For a review on where we are in the "Mother Of All Bull Markets", click here:  http://markostake.blogspot.com/2010/10/correct-me-if-im-wrong.html. 

The Federal Reserve, entrusted with controlling inflation, is actually the engine of inflation.  For a more thorough explanation of the Fed, as it is known to its friends, check out this video as to how it is supposed to work, versus how it has actually fared:  http://www.youtube.com/markostaketv#p/u/5/JiGA8XeZbUo.

With friends like these.....

Marko's Take

A Very Simple Trading Strategy For Gold: Version 2.0

Regular readers may recall two blogs I recently wrote:  "A Very Simple Way To Trade The Very Tricky Gold Market (http://markostake.blogspot.com/2009/12/safe-way-to-trade-tricky-gold-market.html-to-t)  and "Tips On Grabbing Higher Yields" (http://markostake.blogspot.com/2009/12/tips-on-grabbing-higher-yields.html).

I now wish to combine these approaches for an ever BETTER result.  As you may recall from the Trading piece, I suggested a methodical approach to protect your profits while still retaining a substantial exposure to Gold.  In the other piece, I suggested some risk-free approaches to earning higher yields than the paltry ones available today.

So, here's how the two combine:  As you lay off your exposure to Gold via GDXJ, purchase the ETF whose trading symbol is "TIP".  That way, you'll begin building a yield generating instrument in your portfolio!  Keep repeating the process and you'll enhance your Gold exposure with income!  Done correctly, you can not only realize tremendous riches from the Gold, but simultaneously create passive income of substantial size.  It might even rise so high as to provide you with a bona-fide SALARY!!

So, once this process is completed, you might be able to retire!

Ideally, this should be done within the confines of an IRA, but as Archie Bunker would say "que seru seru"!

Now, how can you possibly beat them apples?

Tomorrow, I intend to revisit the prospects and liklihood for economic recovery since Christmas sales have now been reported.

Unless you wish to torture me with your deafening silence, "Take Me On" in the comments section below.

Marko's Take

Tips On Grabbing Higher Yields

There currently exist very few ways of investing safely while earning a decent return.   Those investing in CDs or Treasuries are painfully aware of the ridiculously low yields available on short-term and even long term instruments.

There are two different forms of risk when investing in fixed income.  One of these is credit risk, or the risk of default.  The second risk is referred to as "duration", or the risk of an adverse move in the overall level of interest rates.  Duration is derived largely from a bond's date of maturity.  The more distant the maturity date, the greater the duration.  In turn, as a bond's duration increases, so will its sensitivity to an upward move in interest rates.

One form of higher yielding instruments, which avoid both types of risk, are known as "TIPs", or Treasury Inflation Protected Securities.  They have certain attributes far different from any other type of fixed-income vehicle.  For example, while they DO pay interest they also have a feature which affords protection against inflation as the name suggests.

The "principal" amount of a TIP is adjusted semi-annually for the increase or decrease in the reported Consumer Price Index (CPI).  For example, if the CPI is reported at 6%, the holder receives a corresponding amount in additional prinicipal.  Regardless of the direction of inflation, TIPs will NEVER return less than zero and will mature at 100% of face value as they are an obligation of the U.S. Government.

A variant of TIPs are called I-Bonds (IBs), which are similar to "savings bonds".  However, one can only buy a very limited amount of IBs each year per social security number. You won't receive interest from your IBs until they mature.  The minimum holding period is one year.

TIPs and IBs DO differ in terms of their respective taxable status.   They are both exempt from state and local tax, but not federal tax.  TIPs require the holder to pay tax on distributions and the "phantom" income accrued if the principal is adjusted upward for the rate of inflation.  Therefore, TIPs are probably a better choice for IRAs, while IBs are typically preferred for other types of accounts.   However, it would be prudent to verify tax treatment with your accountant.

Finally, TIPs are available via Exchange Traded Funds (ETFs), but these are relatively new.  My personal favorite has the symbol "TIP" ( What else?) and trades on the New York Stock Exchange.

I hope you find these "tips" on grabbing higher yields a real winner.

Please feel free to leave comments below.

Marko's Take

P.S.  Gold actually breached the $1,100 barrier I spoke of two days ago.  However, the penetration took place only in the final 15 minutes of very thin trading yesterday and was a mere $3 per ounce.  Please do nothing today.  I'll need to explain why later.  Beginning Monday, if Gold breaks below $1,100, use that as your "stop loss" point and once Gold penetrates $1,100 on the upside, it should be safe to re-enter the market.