The problems for those who live on income are over

Since talking about Palestine and Israel clashes with very deep-rooted opposing opinions, let’s change the subject and talk about the fact that now those who want to live on income (or usury as they once …

The problems for those who live on income are over

Since talking about Palestine and Israel clashes with very deep-rooted opposing opinions, let’s change the subject and talk about the fact that now those who want to live on income (or usury as they once said) by buying bonds or specialized funds in bonds now it’s a party. This is interesting from a social point of view, because a season opens in which those who have (a lot of) money can live on an income. And it can also be interesting from a practical point of view, for those interested in investing something.

Inflation fell quickly in Italy to 1.8%, thanks to the general decline in economic activity (which already effectively puts us in recession). In the meantime, however, ten-year BTPs yield 4.6%, more than in other countries except the UK and therefore you would now have a real yield of 3%.

Now you have, for example, the Cassa Depositi e Prestiti which makes a small issue of 1.5 billion in which it pays 5% for the next three years (and then Euribor +0.9%) for 3 years and therefore yields, compared to BTPs at 6 years almost 1% more. Okay little things.

In America it’s a completely different thing. Interest rates have risen to 5.5%, there are once again great opportunities to live on income, after which in recent years it had become impossible due to the famous zero interest rate policy, in the USA as in Europe and Japan. In the last two years, all the bonds and all the bond funds have lost money, as has never happened in 40 years. Because by raising interest rates from 0 to 5.5% the prices of all securities had obviously (symmetrically) collapsed. So those who had bond funds and government bonds lost a lot, even 20%, something that hadn’t happened for 50 years. You can also see this in Italy, if you open the account statement of the mutual bond fund you bought a few years ago.

But now the problems for those who live on financial income are over. This opportunity was created because, for example, in America mortgages cost 7.2% (in Europe about 3% and more), i car loans reach 9%, there are many securitized bank loans that pay percentages between 8 and 10%, the overdraft on the credit card (which is used in America) reaches 27% which is the historical record. In other words, with the Federal Reserve which suddenly raises rates from 0% to 5.5%, then all the other rates on securitized mortgage bonds, credit cards, bank loans, car loans etc… also went up. And in America much more than in Europe or Asia.

It’s easier to explain with examples. These are the most cited US government bonds, like the BTPs in Italy, the 10-year ones and they have collapsed, only in the last year from 131 to 106, so only now are they interesting to buy, while a year ago it was a bath of blood. In fact, the collapse finally seems to be over, because the economy shows signs of weakening, so many people are buying them again this week.

Becchi graphic designer

Now those who have money and want to live on income have inflation falling (also in Europe), the However, rates will still be kept high by the Federal Reserve because the US economy has been overheated for three years by enormous deficits, still at 8% of GDP and therefore there are fears that inflation has become “sticky” (that people have gotten used to it, so both businesses and employees are getting used to it and therefore raise prices and ask for increases). To break this habit then the Fed will keep rates at 5.5% for another two years. Also because the Biden government continues to run a deficit of around 8% of GDP (in Europe we are back on average 4.5%).

In America there are opportunities to buy companies that invest, in a slightly more complex way, in various forms of debt and can pay you 9 to 14% in dividends. If you bought them even just this summer you risked the price falling further, even by 5% in two or three months, as for the government bonds seen above. Now, however, it seems that the economy is slowing down and inflation is dropping to 3% or more so you no longer have much risk.

Let’s take an example. This is a stock listed on the stock exchange, which contains various (non-state) bonds and pays 14%, not 4.5% like government bonds, in the form of a dividend, which however comes from interest on securities it holds within . This “bond” stock has obviously also fallen in the last two years, because all fixed income has fallen in price. Now it has been filled with various securitized debt securities that exist in America (not much in Europe) that pay a lot, so It pays you 14% per year and the price shouldn’t go down now (because precisely the great rise in rates and therefore collapse in prices is over)

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We need to discuss the fact that America is a country where income is a huge “industry”. Interest has no legal limits of any kind, debt is encouraged by laws (interest is discounted from taxes), everything is securitized, everything is also used to create derivatives, etc. In addition, there are also a few hundred “closed” funds listed on the stock exchange with bonds inside whose value fluctuates by up to 10 or 20% compared to the value of the bonds they contain.

In conclusion, an opportunity now exists, which wasn’t there five or ten years ago and only existed in 2008 with the Lehman crisis. It is an opportunity to invest in fixed income, but not in the government one (which among other things is the most dangerous, because after all the US public debt is 34 thousand billion and the European one is only 10 thousand billion). Furthermore, we are not talking about buying bonds that expire in 7 or 10 years, but in three years, which is much more attractive because it is obviously less risky.

After the two-year continuous landslide of all bonds and various obligations, in America you now find many securitized securities which pay much more than government bonds. But let’s talk about mortgages that are “agency” that is, they are guaranteed by government agencies such as Freddie Mae and therefore have risk like government bonds.

The best thing, however, is to rely on funds managed not by Blackrock or Pimco or other mega mega companies worth 10 thousand or 5 thousand billion, but smaller companies, from 10 to 100 billion, managed by individuals who have always had above results for 20 or 30 years. average. These subjects, like Jeff Gundlach of DoubleLine or Boaz Weinstein of Saba Capital, they are good at buying securitized bonds and also “closed-end funds” on the stock exchange that contain them and now they trade at a discount of up to 10 or 15% on the value of the securities that they have inside. Combining these things, in a scenario in which interest rates have risen suddenly, but do not seem to rise yet, in America you can buy funds or listed companies that can give you from 10 to 14% and with less risk, perhaps even the same state securities (talking about 3-year maturities, not 10 years).

This is now the most exciting topic in the financial markets if you try to read about it Bloomberg and other American media. Finally the good times are back when you could live on financial income, rather than wars…