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Warning: Don’t Get Burned by Treasury Bond Betrayal

Posted July 02, 2021

Zach Scheidt

By Zach Scheidt

Warning: Don’t Get Burned by Treasury Bond Betrayal

Have you ever felt betrayed by someone you considered a friend?

I want to share a personal story with you that I’ve never talked about publicly...

It's a little painful to dredge up the old memories. But I hope this story helps put an important issue into perspective when it comes to your retirement.

Because today, there's a looming betrayal that could severely damage your retirement.

And while I can't go back and relive the years that led up to the event I'm about to share with you…

I can help you take steps to avoid a similar betrayal from a "friend" you may be partnering with for your retirement today.

Spoiler alert... There's actually a happy ending to my story. And you’re part of the finale!

But we'll start this story back to when I was much younger...

Losing a Business (and a Friend) Both at the Same Time

Years ago, I started a business with a close friend of mine.

John and I worked hard to build an online platform to attract hundreds of paying customers and build a recurring revenue stream that brought in multiple six-figures in income every year.

It wasn't an easy process. The days were long and both of us often pulled all-nighters working to make this business a success.

In the process, we became more than just business partners. We became close friends.

Over the five-year period that we built the business, John and I both walked through a couple of dark personal times.

When John was struggling with depression, I kept the business going and checked in with him every day.

And when I had my own dark season, John was the friend who helped me work through some big life challenges.

We were brothers in the trenches — building a business and walking through life together. That's probably why it hurt so bad when the friendship dissolved.

I won’t go into too many details. But I will say that personalities changed, unreasonable demands were given and ultimately I felt that I needed to sell my half of the business to John.

To make a very long story short, John defaulted on his payments for the business, threatened my family and ultimately stole my portion of the business we spent five years building.

As I'm sure you can imagine, this hurt!

It wasn't about the money (though at the time my family needed the extra capital). It was much more painful to have a close relationship turn hostile.

Looking back, I know my situation wasn't all that unique. We've all had friends betray us in one way or another. And it hurts... There's no way of getting around it.

Quite frankly, even tough situations like the one with my friend and business partner come with silver linings.

For instance, I learned so much about efficiency, work ethic, organization, communication, business structure and negotiations through this business venture.

And those lessons and life skills can never be taken away — regardless of what happens to a particular business or market.

I'm actually grateful for the entire experience because of the life lessons I took away from this failed business relationship.

On that note, I'd love to hear what you’ve learned in some of the toughest seasons of your life.

Would you shoot me an email and share your story with me?

I'd love to hear from you and hopefully learn some of the lessons you’ve learned without having to go through the same tough situation.

And that's the point of today's alert...

There's a tough situation setting up in the market right now that I want to make sure you're aware of — and one that I want to help you avoid.

It's the financial equivalent of being betrayed by a friend. And Reader{{FirstName}}Reader, I don't want it to happen to you...

Our Friendship With Bonds Is Over

There's a major risk for retirees that's developing in the markets right now. It’s a perfect storm that will likely devastate many retirement accounts over the next several years.

Unfortunately, this risk comes from an area of the market that’s supposed to be friendly.

And that's why this situation feels so much like a betrayal.

Because the very positions millions of retirees hold in their accounts that are supposed to keep them safe are the ones that will cause the most pain as the economy reopens and markets get back to normal.

What is this "safe" ticking time bomb that so many retirees are holding?

They're long-term government bonds... Previously the safest income positions you could ever hold in your account.

And these bonds are on the verge of blowing up retirement accounts across the country. Here's how the dangerous situation is setting up.

As you know, interest rates are exceptionally low in today's market. The Fed has done everything it can to push rates to extremely low levels in an attempt to stimulate the economy.

Bond prices (especially long-term bond prices) trade in the opposite direction of interest rates.

So when interest rates are very low (like in today's market), bond prices move to historical highs.

And conversely, when interest rates rise, bond prices drop!

It's important that you understand this situation. Because for most retirees (and even for investors midway through careers and getting closer to retirement), long-term bonds represent a big part of investment accounts.

Even balanced mutual funds like the ones that target a specific retirement date hold huge positions in long-term government bonds.

So if you're invested in these mutual funds, your wealth is certainly at risk.

I want to give you a bit of a historical perspective so you can see what I'm talking about.

A History of Government Bond Yields

If you look at the two charts below, you'll see that interest rates for U.S. government bonds are very near all-time lows.

For instance, the benchmark 10-year Treasury bond currently yields about 1.43% per year.

That's well below the 9% rates we saw in the 1990s, and less than half of the 3% rates these bonds were yielding just before the coronavirus crisis hit.


The 30-year bond picture is very similar...

Today, 30-year U.S. Treasury bond yields are just above 2%. Over the past few years (before the coronavirus crisis), rates hovered a bit above 3%.

And before the financial crisis of 2007, rates on these bonds were typically between 5% and 6%.


Since the coronavirus crisis hit, the Fed has been pouring hundreds of billions into the bond markets, intentionally pushing yields lower (and prices higher).

But now that the crisis is ending and the economy is rebounding, the Fed is starting to communicate plans for reducing bond purchases.

And this process will allow rates on long-term bonds to rise back to historical levels.

Some worry that since inflation is becoming more of an issue, we could not only see bonds get back to average yields. The Fed may be forced to raise rates in an attempt to combat inflation.

So there's potential for rates to actually rise back above where they've traded for the last two decades.

And that's where the danger comes in for so many retirees.

How Rising Rates Affect Your Retirement

You may know intuitively that when rates move higher, bond prices move lower...

But how much lower?

To answer this question, bond investors use a statistic called duration. This statistic simply measures how much a bond's price will move if the interest rate changes by one percent.

A recent Bloomberg report pegged the duration of a 10-year Treasury bond at 8.7 and the duration of a 30-year bond at 21.

This means that if rates rise one percent, investors in 10-year Treasury bonds can expect their bonds to lose about 8.7% of value.

And if you're invested in longer-term securities like 30-year Treasury bonds, a one percent move in yields could cause your investment to lose 21% of its value!

Keep in mind, these are Treasury bonds — the investments you put into your retirement because you want your money to be safe!

If you're invested in a safe bond and it loses 21% of its value, doesn't that feel like a betrayal from a friend?

Of course, if you've got experience investing in Treasury bonds, you know that ultimately you're going to get your money back.

That's because the government will technically always pay its debt — even if Uncle Sam has to print more money (or create more digital currency) to meet its obligations.

But in the case of a surging economy and rising interest rates, your true retirement wealth will erode because of inflation.

So while you'll still technically get your money back, waiting through 10 years of inflation (or 30 years of inflation)  just to get your money back is a terrible situation.

That's why I'm pounding the table today, asking you to take a close look at your retirement.

Because if you have any long-term bonds in your account (or any mutual funds or target-date funds that hold these bonds) you need to take action right away.

Instead of letting rising rates degrade your wealth over the next few years, please sell these positions right away.

You can then use the cash to invest in many of the solid investment plays we've been talking about to help protect and grow your wealth.

The plays we've been covering are designed to thrive in an economy that is rebounding and in an inflationary environment.

Don't let your "bond friend" betray your retirement wealth.

Instead, take the current gift of higher bond prices, sell those positions at a premium price and invest in better opportunities to grow your wealth.

Here's to building your rich retirement!

Zach Scheidt

Zach Scheidt
Editor, Rich Retirement Letter

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