It's almost impossible to stop thinking about what the past few weeks' volatility means for the stocks and your portfolio. I'm bearish on stocks and think you can wait to buy, but you also need to think about the other side of your portfolio -- bonds.
That's especially important because of the uncertainty around future Federal Reserve action, coupled with the fact that some nations have actually adopted negative interest rates on their government bonds.
How Debt Plays Into Your Investments
Now, companies have assets and liabilities, and so do most of us as well. So, as important as it is to focus on your investments, it's critical to focus on your liabilities, too.
In fact, you might make more money for yourself with less volatility by focusing at the current moment on your debts, including your mortgage.
Consider this chart of 10-Year U.S. Treasury yields, which have a big impact on mortgage rates:
10 Year Treasury Yields
As the chart above shows, 10-year Treasury yields are now lower than they've been at any time since 2016. That means that if you didn't refinance your mortgage in 2016 or even 2017, you have an opportunity to do so now.
And even if you did refinance then, you have the potential now to refinance again and extend your current loan's term at similar or even lower interest rates. For example, if you took out a seven-year adjustable-rate mortgage in 2016, you only have four years left on your loan's introductory rate, so consider refinancing. You might not hit this cycle's absolute lows for mortgage rates, but I always advocate reducing uncertainty where you can.
Now, mortgage rates tend to be slightly slower to decline than Treasury yields do, but with a benign credit environment, they should come down over the coming days and weeks. I suspect that spending a few hours reviewing your mortgage and locking in either lower rates or longer maturities might "make" you money with minimal risk.
The Strange World of Negative Interest Rates
We're even seeing negative interest rates in some country's government bonds these days, even though I personally think that negative interest rates are a mistake.
I doubt we'll get there here in America, as I'm optimistic that we'll get renewed economic growth. But I think it makes sense for the Fed to be dovish here to give the Trump Administration more latitude in fighting with China for a better trade deal. (However, I'm not a fan of how Trump has chosen to fight with China -- primarily over Twitter.)
Now, the world of negative yields is confusing. For example, the German 30-year bond was yielding -0.12% at last check.
That seems insane at first blush. Why would you buy a German 30-year bond with a negative yield when you could just buy an American one with what's a 2.14% yield as I write this?
There are actually several reasons for that, such as:
- Some institutional investors can only invest in euro-denominated debt. Many funds have investment mandates that they must follow, and it's extremely common for European companies to have to buy assets denominated in euros.
With the risk of a foreign-exchange war increasing, many foreign investors don't want to own U.S. Treasuries if we're about to devalue the dollar.
On the "wonky" side of things, the spread between two- and 30-year U.S. Treasuries is smaller than that of two- and 30-year German debt. If you're a German investor and can borrow money at the two-year rate and use it to buy a bond paying the 30-year rate, you actually "earn" more interest than you do by buying a 30-year U.S. Treasury with money borrowed at the two-year U.S. Treasury rate. That's weird, but it means that sophisticated investors can get more "net interest" and benefit from a steeper yield curve by putting their money in overseas bonds.
It hurts my brain to think about this, as we aren't used to thinking about double negatives when it comes to interest rates. But the bottom line is this -- Don't be suckered into playing into the recent U.S. Treasury rally. I think it's gone overboard here.