by Bryan Perry

February 4, 2020

After a period of relative calm following the finalizing of the Phase 1 trade deal, volatility has reentered the market, sending stock valuations lower and bond prices sharply higher. Yields across the curve are plunging with the 2/10-year spread inverting last Friday. The 2-year T-Note yield is 1.57% and the 10-year T-Note yield stands at 1.51%, when on January 2 the spread stood at a comfortable +33 basis points.

Treasury Notes Yield Table

Bond traders aren’t necessarily raising a red flag for the economy yet, but the spread of the coronavirus is fueling risk-off bets in the stock market as authorities struggle to contain it. To put the latest bond rally into perspective, the yield on the benchmark 10-year Treasury is testing the lows of the past 20 years, matched only in early 2012, early 2016, and again in the third quarter of 2019, at the peak of the trade war.

Ten Year Treasury Note Yield Chart

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

One real-time development that deserves every investor’s attention is how the bond market’s fear gauge is trading just off its lows, which means we may not have seen the worst of yield curve volatility yet. The 10-year U.S. Treasury Note Volatility Index (TYVIX) – the bond market’s equivalent to the CBOE VIX – closed at 5.35 on Friday, way off the highs seen during prior times of elevated short-term fear and uncertainty. Could this disconnect foretell a further plunge in yields? The answer is quite possibly yes.

United States Ten Year Treasury Note Volatility Index Chart

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

Last week’s Fed statement was little changed from the December 11 FOMC meeting, saying: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent.”

And then this: “The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2-percent objective.” And this: “The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.”

The Fed said all this prior to the yield on the 10-year Treasury falling to the same level as the overnight lending rate banks charge each other to maintain their reserve requirements. The latest reading from the CME FedWatch Tool shows the probability of a rate cut at the March 18 FOMC meeting jumping from 4.2% on January 2 to 26.6% as of February 2, and a 37.6% chance of a rate cut at the April 29 meeting, up from 9.8% four weeks earlier. If the10-year yield trades below 1.5%, these probability numbers will surely rise, and the Fed knows far too well how much the stock market hates an inverted yield curve.

Heck, they could even make an intra-meeting rate cut, blaming the virus threat just to stabilize the market and normalize the yield curve. That move is not out of the realm of possibility if yield inversions persist.

Target Rate and Probabilities Bar Chart and Table

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

So, what looks “best in class” for income investors looking for attractive yields that are becoming scarcer by the day? Given the robust nature of Q4 sales and earnings results from big-cap tech companies, and how solid the outlook is for the continued buildout and expansion of 5G infrastructure, cloud computing, and logistics for ecommerce distribution, investors should look to three high-tech REIT subsectors for both dividend growth and capital appreciation.

Data Center REITS – there are five listed stocks in this space, with CoreSite Realty Corp. (COR) sporting the highest dividend yield of 4.14%.

Cell Tower REITS – there are three listed stocks in this space, led by Crown Castle International (CCI) boasting the highest dividend yield of 3.20%.

Industrial Logistics REITS – there are 15 stocks in this space. Industrial Logistics Properties Trust (ILPT) is the purest play, with Amazon.com as their largest tenant, paying a very attractive 5.77% yield.

These REITs, and the balance of those that weren’t mentioned, barely budged within the current market correction. They can all be researched at www.reit.com. This is what I like to describe as “ballast income” when market seas are rough, and a good place to consider having some assets doing business in sectors enjoying strong compounded annual growth rates (CAGR) and a history of rising dividends with yields paying two, three, and even four times that of the 10-year Treasury.

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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