The Bond Plateau


Can you feel it? There’s been an awakening. A shift in the world of investing that will bring about unforeseen change. A dusty cobweb covered switch in some far off corner of the investor’s brain was finally flipped on.

At the start of the year, Goldman Sachs and most other big firms were predicting US interest rates to rise. Now no one is. It has reached the point that investors aren’t even willing to sell their bonds to a price insensitive buyer such as the BOE. From zerohedge:

“Longer-dated bonds are “an area where people are hunting down what yield is left – you have to extend out into that area to get anything really,” Aberdeen’s Hickmore said. Carney “is going to say ‘it’s very early days, this is day one of the long-end purchasing.”

Investors chief concern these days is “what if interest rates never rise”. That’s right, bonds have reached a permanently high plateau. Of course we only need to look back a few decades to know this doesn’t hold.

With that said, I think a congratulations is in order for our unbelievable central bankers. Like Arnold Schwarzenegger covering himself with mud to hide his body heat from The Predator, the central bankers have blinded investors to risk.



This potentially final embrace of central banking policy comes at the very heels of a growing movement of people (myself included) who doubt the efficacy of central banking policy. After the Japanese implemented negative interest rates, it seemed the market was finally fighting back. However as Morpheus notes…



But perhaps people should not mistake a battle for the war. Investors have proven quite capable of buying anything with a yield as long as there is no perceived risk. The funny thing about risk is that you don’t know you have it till it happens.


Wouldn’t you know? Global defaults in 2016 have already reached its second highest level in the last 12 years. Delinquencies on commercial and industrial loans is also spiking to crisis levels. Is now really the time to blindly plunge into corporate credit?


Of course this perceived lack of risk is a fallacy, and the question then becomes, when does risk actually matter? Which brings me back to the irony of this potentially final embrace of central banking policy. Pension funds have piled on the risk to maintain their mandated returns.p1-bx524_penris_9u_20160531120608

It’s important to note that I have no idea when this will end. The nature of irrational behavior is that it is fickle and unpredictable. The end result may be obvious but our journey there is anything but.

But every crisis is an opportunity and as long as investors are blind to risk and desperate for yields some pretty interesting investments that I already own become that much more desirable – energy storage and solar and wind power. These three technologies allow investors to not only get a positive yield, but with very low risk.

If you live in an area like Arizona or Texas or California where the electricity rates vary tremendously by the hour, you can charge up a battery during off hours and use that energy during peak hours.

Depending on your location an investment in a energy storage will save you at least 7% of your investment per year in electricity costs. Over the longer term increased battery storage capacity would obviously narrow the gap between off and peak electricity rates but that added benefit is beyond the time horizon of this post.

Demand for wind and solar is absolutely exploding right now.  Just 3 years ago, the US installed its 10th GW of solar power, and now the US has 10 GW of utility-scale PV projects under construction.

And as the technology improves, so too does the yield. I’ve already discussed how the costs of solar panels is set to fall. Solar panels and wind turbines are also becoming more efficient. Set against the back drop of falling sovereign bond yields, the rising yields on these technologies and their supply chains look even more attractive.

I briefly diverged away from the consequences of this “bond plateau” but rest assured there will be many more, most unforeseen. Whether that means green technology or Irish REITs or some other exotic asset, there will be other ways to profit from this irrational behavior.

It’s important to remember that irrational behavior is also incredibly volatile, and yet US equity volatility is near record lows. The risk reward on that trade looks spectacular.

Alas the purpose of this post was to bring to your attention the mindset that plagues investors today and adjust accordingly.




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