by Bryan Perry

January 20, 2021

This past weekend, the incoming Biden administration released a list of executive actions, some of which are sure to create some market headwinds. The repeal of the Trump tax cuts and the imposition of a mandatory $15 per hour wage minimum will likely have the broadest impact on investor sentiment.

Extensions on student loans and evictions, rejoining the Paris Climate Agreement, the reversal on travel bans on certain Muslim countries, reinstating the Iran Nuclear deal, granting amnesty for 11 million immigrants and the expansion of the Affordable Healthcare Act are not likely to impede the market in the near term, but collectively they raise questions about policy directives and how to pay for all of the above.

The market cares deeply about tax policies and campaign promises that have a tendency to morph into different-looking policies when they are finally implemented. The national debt ended 2020 at $27.75 trillion and is likely to top $30 trillion shortly and keep rising at a rapid clip with pandemic-related relief stimulus and spending on infrastructure, healthcare and education.

On January 6, the yield on the 10-year Treasury popped up through the 1.00% level, trading up to 1.19%, where it ran up against a 20-week downtrend line (blue line, below) and retreated back down to 1.09% by last Friday. Weak retail sales and weak employment data put the brakes on the selling pressure within the bond market, but it now appears that long-dated yields are going higher.

United States Ten-Year Treasury Note Yield Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If and when the 10-year Treasury yield breaches 1.10%, the above chart suggests that the next level of overhead resistance lies at 1.50%. The bump in yields is being attributed to commodity price inflation, huge deficit spending and a weakening dollar. The countervailing force is the $120 billion per month in Quantitative Easing (QE) being conducted by the Fed as large-scale asset purchases of treasuries, mortgage-backed securities and corporate bonds is intended to push down longer-term interest rates.

Any incremental rise in yields along the 3-10-year curve increases interest on the national debt by hundreds of billions of dollars per year. That’s probably not a huge deal if the 10-year Treasury Note yield peaks at 1.5%, but a further rise to 2.5% to 3.0% will get the market’s attention if GDP growth doesn’t coincide with the increase in bond yields.

Ideally, as economic growth is restored, and the Fed is able to taper QE volume later this year or early 2022, the dollar should hold its value and even rally while rates tick higher based on a healthier economic outlook. Under these conditions, the stock market has historically performed quite well as revenue and earnings growth improve for most, if not all market sectors.

United States Dollar Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The long-term chart of the dollar shows where the important levels of support are easily identified. A breach of the 88.0 level opens the way lower to 80.0, where central bank intervention would be a real possibility. Incoming Treasury Secretary Janet Yellen is a supporter of strong dollar policy and without a doubt she and Fed Chairman Jerome Powell have a big job on their hands to maintain low interest rates and maintain a stable dollar while Biden and Congress earmark $5.4 trillion in new spending by 2030.

Biden Spending and Revenue Plan Pictograph

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If enacted, the Biden budget would elevate federal spending to 24% of GDP by 2030, according to the Wharton study, and exceed the crisis spending spikes during the 2008-09 financial crisis and the 2020 pandemic and add another $2 trillion in deficits to the spiraling national debt. I think it’s safe to say that the dollar will trade lower and Treasury yields will rise further as the debt-to-GDP ratio climbs to 130%.

Total Federal Debt as Percentage of Gross Domestic Product Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, where should investors target attractive income-generating assets in an environment characterized by a weak dollar, rising rates and a rising stock market?

Convertible bonds and convertible preferred stocks are one class of securities that outperform under these conditions. A world awash in liquidity, where capital flows coming out of bonds and rotating into equities is prime time for convertible debt as the performance of these assets are tied to the corresponding common stocks and yet still mature at par if not converted or called-away at significant premiums.

By themselves, converts are not easily traded by individual investors as small lots of crème de la crème securities are hard to locate. However, there are a few closed-end funds that are well diversified, employ about 15%-20% leverage, trade at attractive discounts to Net Asset Value, generate annual yields of 6%-7% and pay out on a monthly basis. A little due diligence will produce some investible candidates which is one way income-oriented investors can have their cake and eat it too.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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