Are your bond dividends safe? An easy way to check

“Come on dad.”

Pause. And a sigh.

“I will reimburse you?”

Ah, there it was. The fiscal responsibility we have worked hard to instill in our seven-year-old. A recognition that money doesn’t grow on trees.

(Everyone knows greenbacks only grow on the Federal Reserve balance sheet!)

My daughter’s intentions were sweet. She had successfully lobbied to redirect the “daddy bus” to a retail store. The young boss had her eyes set on a toy and also offered to buy one for her sister.

Well, I should clarify. She first offered me the possibility of buying both. Your income strategist offered a compromise:

“What would you say you to pay for your own. And I’m going buy the other one for your sister.”

His rebuttal was swift. “But I do not have my money with me.”

It wasn’t his father’s first rodeo with a broke accomplice, however. I had a friend in college who regularly went out to bars with his ID. but no wallet (and so, no money.) Growing up, I covered his beers, which regularly hit double digits.

“You can pay me back,” I offered my daughter.

the credit risk of my child not reimbursing me was low. She was about to owe me $10, and the new sign on her piggy bank said $34.91. Only seven years old, she already had a top notch credit rating with me.

Loan guarantee from your income strategist

Now she seeks to replenish her war chest by doing chores. Which was great, until she started asking her mom how much specific items cost. And she started quoting me $20 for each task.

(β€œShe knows how expensive everything is,” my wife explained to me this morning.)

Fed money printing has created wage inflation in my own household. Twenty bucks to get the game room back – ridiculous.

High inflation figures and rising interest rates are also weighing on bond prices. Rising rates weighed on these popular bond funds:

  • the iShares 20+ Year Treasury Bond ETF (TLT) is down 11% since the start of the year. This is not what investors are buying into when they buy “safe” Treasuries. But who wants to own the 1.7% yield of TLT in a country with 8% inflation?
  • the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)meanwhile, is only down 5% since the start of the year, thanks to its 4.3% return.

Still, we don’t like to see bond funds lose value. Their job is to pay us and, at the very least, to walk aside. Should we worry about the security of bond dividends?

After all, in Stockville, falling stock prices often signal a dividend in jeopardy. Does this apply to Bondland?

Not really. Bond prices have two factors: duration risk and credit risk, in the jargon of the industry. Most bonds and bond funds have been penalized over time since the beginning of the year, as the long rate (10-year Treasury rate) and inflation have increased.

Credit risk is not an issue today, which means payments are safe. I will show you how we can check with a quick credit spread check.

Credit spreads show the probability of redemption – the “$34.91 piggy bank signs” of the bond world. Stable spreads show that fixed income investors are not worried about credit risk because they are willing to trade risk for higher return.

Are your bond dividends safe? An easy way to check

A quick way to check credit spreads is to compare the returns of HYG and TLT funds. I chose each because they are large, liquid and reflect their markets. TLTs is a one-click proxy for Treasuries, while HYG is the world’s largest high-yield (“junk”) bond fund.

If trouble were brewing in the credit markets, the relationship between these funds would show it. Specifically, the “spread” between the returns offered by each ETF would widen.

In March 2020, the spreads between TLT and HYG widened quickly. The global economy was on the brink as we retreated. Because corporate debt looked like a bubble about to burst, investors fled to higher quality Treasuries (and TLTs) and fled junk bonds (and HYGs).

These spreads really could have exploded, except the Fed started printing money like crazy. With the new money, Fed boss Jay Powell bought debt in all areas – from Treasuries to junk bond ETFs themselves! Powell’s printer quickly calmed these credit spreads:

In March 2020, spreads widened. They are fine now.

Are your bond dividends safe? An easy way to check

Moving to the right of the chart we can see that as of today the spreads are okay (within their normal range). Subject to change, of course, but currently credit risk is moo in the bond market. We should expect our dividends to continue to be paid.

Duration risk, unfortunately, is a different story today. The long rate continues to rise, and why shouldn’t it? Inflation is higher than Snoop Dogg, medicated to its most extreme levels in forty years.

To protect against inflation, rising rates and potential problems in our retirement portfolios, I created the The perfect crisis-proof retirement portfolio.

With this retirement strategy, you can quadruple your current investment income with very little risk. Please let me share the details, along with my comprehensive research on dividends with you right here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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