Believe the Chinese government this time

As a general rule, don’t simply trust what a government is telling you for granted but always with a grain of salt. It is especially true for the Chinese government for many people given the dis-transparency of the government for what they are doing. But this time you better believe the Chinese government for what they are saying. I’m talking about their reported intention of reducing their holding of the US Treasury. If you still don’t know what it means, it is a big deal for the US government bonds and also the US dollar, which in term will have a huge impact on the US economy down the road.  You see, China is the biggest US Treasury holding country in the world, having $1.2 trillion of the US government debt that is almost 20% of the total debt held by foreign countries. What’s the main concern for a county holding such a big amount of debt? Its value, right?! The bond market as a whole has enjoyed a 3 decades of uninterrupted gigantic bull run and the past few years of worldwide QE lead by the US Fed has significantly prolonged this bull life. But finally this has come to its end. The US Fed has stopped the QE and has already started to raise the interest rates, which is triggering the start of a bond bearish trend that is likely continue for decades as well. Yes, buying bonds with increasing interest rates sounds great to get more income, but the fixed gain cannot be compensated with the fast uncapped loss of the principal bond values. That’s why shrewd investors will be much less willing to buy bonds. You can bet the Chinese government is thinking something similar in order not to be hurt too much when the Treasuries lose values over time. "If China stops buying Treasuries, the market could suffer," strategists at Jefferies said.

I have warned about the possible turning point for the bond market several times in the past and I have also said the 10 year Treasury rate of 2.65% is likely the threshold to trigger a long lasting bear run for bonds. Now we are seeing the 10 year rate of 2.6% already and it is almost a certainty that we will see 3% this year.  There are a few implications that will directly impact us without your active participating in the bond market:

• The mortgage rates, which are closely tied to the long term Treasury rates, will increase moving forward. Initially it may not be much as the long term rates are still extremely low historically but it will move up faster down the road. If you don’t lock your mortgage rates or only lock for a short period of time, you may want to think twice.
• Some friends asked me if they should buy bonds now. As a general rule, you don’t want to buy bonds, especially long term bonds just for higher interest income as you will be hurt more when the underlying bond values decline. Of course, as part of asset allocation for your whole portfolio, bonds should always be part of it and for that reason, buying some bonds is reasonable. Personally I don’t want too much of it.
• For very shrewd professional bond investors, they could be doing well with increasing interest rates (decreasing bond values). Insurance companies are typically doing well in this kind of environment as they have the money power with sophisticated techniques to enjoy higher interest rates but without being hurt much with the bond value decline. Just give you one example, investing in short term bonds, especially those corporate bonds that are on sales but with good fundamentals can often be very lucrative. This often leads to equity type of return with a lot more safety than stocks. That’s why I told my friends that buying the special type of Whole Life (WL)  is a great idea in this environment because  the cost for this type of WL is substantially (over 50%) lower than the traditional whole life but it may pay a lot higher dividends when the interest rates start to move up. When the long term interest rates were in double digits last time (in the 90s), the WL policy I’m holding now was paying a dividend as high as 10% on top of the guaranteed 4% interest rate to the policy holders. I expect we are going to see something similar in the years ahead. So what I’m getting is a minimal 4% interest income that cannot be reduced regardless what happens in the market and additional 1% floating dividend that has been paid by the company for over 150 years that has a potential to go up toward 10% if the long term interest rates shoot up. Over 70% of the fast accumulated cash value in my WL policy can be used for any purpose at any time during my life with a de facto zero loan rate (i.e. net cost free). This has especially satisfied me and family for the potential need for the long term care that is almost inevitable and will be very expensive during our senior life time. If we are lucky enough that we won’t need much for the long term care, then the big trunk of money (millions of dollars) accumulated in my policy will be safely passed to our kids tax-free. And the beauty of this type of life insurance is that it won’t be impacted whatsoever by how the stock market is doing. It’s supper safe and legally bonded under the strict government regulations. You may see more details about this type of Whole Life I talked about before.

Apart from the above, if you are interested in shorting the bond market, one easy way to do so is to buy the inverse ETF such as TBF or more risky TBT.