September 17, 2019

At the end of August and into the first week of September, the yield on the 10-year Treasury traded between 1.45% and 1.50%, down from 2.55% back in early May. A full point drop in the benchmark bond over a three-month period is dramatic. It can only be explained by either the economy fast-tracking towards a recession or the collapse of global yields in developed sovereign countries sparked by a massive flood of capital into the U.S. Treasury market to lock in rates that are substantially higher.

From the most recent economic data that has crossed the tape in the past two weeks, it is clear that the latter scenario is the impetus for the dramatic rally in the bond market. Retail sales, consumer sentiment, business inventories, core inflation, factory orders, the ISM Non-Manufacturing Index, average hourly earnings, and private business hires all came in above forecast. It was a parade of upbeat data points that clearly disproved the base case for a recession and the bearish sentiment that ruled the month of August.

When it became crystal clear to the bond market that the domestic economy was on solid footing – and then came news of trade talks being restarted in October – a sharp sell-off in the Treasury market ensued after Labor Day. As of last Friday’s close, the 10-year Treasury Note yield had risen sharply to 1.90%.

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

he narrative about where U.S. bond yields are headed has taken a stunning change of course in just the past week. There was widespread consensus that U.S. bond yields were headed to zero. For a time, that seemed all but certain, until a stunning sell-off crushed the stampede of late-August bond buyers.

Even as the ECB lowered its deposit rate to -0.5% and re-launched its QE bond-buying program to the tune of $20 billion per month in euro-denominated bonds, it didn’t stop the mad rush out of U.S. bonds. All this comes as the Fed is all but guaranteed to cut the Fed Funds Rate by a quarter point to 2.0%.

Correction in Hot Growth REITS is a Buying Opportunity

The rotation out of bonds and bond proxy sectors was also highly evident last week. Where REITS, utilities, consumer staples, and assorted high-dividend stocks and ETFs were delivering very steady returns year-to-date for income investors, they have been subject to widespread selling pressure since the beginning of September. The hardest hit of these assets has been the high-growth REITS within the logistics, self-storage, data center, industrial cannabis greenhouses, and cell tower sub-categories.

Just when it seemed the REIT train had left the station, income investors have suddenly been given, in my view, a truly attractive entry point in the leading growth REITS. For instance, the cannabis greenhouse operator Innovative Industrial Properties (IIPR) has corrected from $139 to $91, and cell tower and 5G pure-play operator American Tower REIT (AMT) has corrected from $242 to $215.

(Navellier & Associates does not own IIPR and AMT in managed accounts and our sub-advised mutual fund.  Bryan Perry does not own IIPR and AMT in personal accounts.)

It’s also my view that the current correction in the secular bond market rally is just that, a correction, and not the beginning of a bear market. Bond prices rallied way too high and way too fast last month to avoid undergoing a radical bout of consolidation on the heels of better-than-expected U.S. economic data, fresh trade talks, and the upcoming Fed easing that is often preceded by buying the rumor and selling the news.

The chart below is that of the broad REIT sector, iShares S&P TSX Capped REIT Index ETF (XRE).

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

For all those that admire and respect technical analysis, shares of XRE broke out of a five-month base in late August that coincided with the 10-year T-Note trading at 1.45%. As the 10-year yield rose back up to 1.90%, shares of XRE have pulled back to key support, where buyers should emerge by month-end. By the way, shares of XRE sport a 4.20% dividend yield and pay out dividends on a monthly basis.

This investment falls into the “keep it simple, stupid” category, meaning it is ideal for retirees or anyone else looking to own a real estate portfolio with pristine balance sheets paying 2.2 times that of the 10-year T-Note, 2.3-times that of the SPDR S&P 500 ETF (SPY) while posting a year-to-date return of +15.6%, not including dividends. And it’s accessible with the simplicity of a click of a mouse.

From the many domestic and global investment scenarios that are colliding for space within the various distribution channels of financial news, opinion, and information, this back-and-fill situation in the REIT space is what jumped out most to me. Against the current investing landscape, where wild sector rotation, Fed policy, trade talks, Brexit, and election politics are dominating the financial media, income investors have what I believe is a unique opportunity in the crème de la crème real estate market to “buy the dip.”

About The Author

Bryan Perry

Bryan Perry

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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