And I don’t like what I’m seeing.
10-year bond yields rocket past 5% again.
30-year bond yields hit its highest level since 2007.
What struck me last night was how investors are now expecting another interest rate hike in the Federal Reserve’s October meeting.
In fact, the chance of another rate hike when the Federal Open Market Committee meets again at the end of October jumped to 73%.
In my earlier email on talking about Fed hiking rates – Singapore REITs – things might get ugly, I said:
That sudden shift in a unanimous vote made me sit up.
The funny thing is, I would have expected stocks to have dropped more than they should have this week. But it didn’t.
A steady stock market can be a red herring. Near zero interest rates have led to a 40-year golden bull market (Interest rates peaked at 15% in 1981 and went to 0.1% in 2011). That’s why most of the returns are coming from tech. People get complacent.
However, the real signal comes from the bond market. As a former fixed income analyst, I say bonds are usually the first to price in trouble. After all, we’re probably the most skeptical analysts in the financial industry.
Rising bond yields today are a reflection of what’s going on right now
1. Inflation is more persistent than ever.
The US inflation rate is 3.4%, which the Fed is struggling to keep it lower. Then you’ve the Middle East war that’s not ending soon.
That’s pushing oil prices higher. And that’s pushing supply-starved raw materials and commodities higher.
According to S&P Global
2. A much higher US debt-to-GDP.
Today, the US pays a much far higher amount of interest costs – exactly $1.25 trillion. Normally that can be solved if the US economy goes fast enough to service its debt costs. However, that’s going to be challenging with US fiscal deficits rising over the years.
And how can I almost forget?
3. The massive AI spending.
It’s estimated hyperscalers will spend around $5 trillion in data centre projects by 2030. You’ll know data centers suck up huge amounts of materials – electricity, water, copper, chips. You know what that leads to, right? Right? Higher inflation.
What I’m doing
Not all stocks will be slaughtered by rising interest rates (unless you’re in high growth tech stocks)
You’ll know I write about dividends on dividendtitan.com. I’m biased to say in this change in interest rate cycle, I’m going to make sure I’ve enough dividends to bulletproof my portfolio. And I’ve got good reasons for this.
Dividend stocks tend to compensate for rising inflationary periods. During the 1970s, dividends accounted for 73% of long-term returns during that era, with rising inflation.
What this means is when the stock market gets bullied by inflation, I want to make sure my portfolio continues paying me income. And that income grows.
More specifically, I focus on companies with strong dividend growth. I want to pick stocks that have rising dividends that will beat inflation over time. Rising dividends mean a company’s hallmark of business excellence.
Think companies with a strong brand – Visa, Hershey’s, McDonald’s, Walmart, Starbucks and so on.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
