Not Even the Bond King Can Escape Income Exodus

Income Exodus is here… And it’s taking no prisoners.

Bill Gross—the “Bond King”—has lost more than a half-billion dollars so far this year in his bond fund. That makes 2018 one of the worst years of his storied investment career.

Gross earned the Bond King nickname because of his impressive performance. His PIMCO Total Return Fund earned almost 8% annually over the 27 years he managed it.

By the time he left in 2014, the fund had $293 billion under management… making it the world’s largest bond fund at the time.

He’s so well respected that the Fixed Income Analysts Society inducted him into its Hall of Fame in 1996. And he received the Bond Market Association’s Distinguished Service Award in 2000.

But not even he can make money as Income Exodus approaches. That’s when rising interest rates crush the bond market.

If the world’s best bond investor is struggling in this environment, that means it’s time for ordinary investors to find “safer” alternatives.

The One Sure Thing in Investing

In the markets, there are very few sure things. But one thing you can count on is that when interest rates rise, bond prices fall.

Right now, interest rates are on the rise… Not even the Bond King can make money in this environment.

Investors are fleeing his Janus Henderson Global Unconstrained Bond Fund, which saw more than $580 million in outflows this year. That’s a 7% drop… one of the worst of his career.

These outflows will push bond yields higher… which means bond prices will continue to fall.

That’s why we’ve been telling you to avoid bonds. We don’t think the situation is going to get any better… In fact, it could get a lot worse.

The last time we had a rising interest rate environment was in the 1970s. During that decade, bond investors lost 60% of their wealth.

Palm Beach Letter editor Teeka Tiwari has been warning about Income Exodus for years. Here’s what he told me in a March 2018 interview:

I know many readers are retirees or at least nearing retirement… and are dying for yield. But don’t buy into bonds yet. Things are probably going to get worse.

And we’re not the only ones sounding the alarm…

Jamie Dimon is CEO of JPMorgan Chase. Last week, he said he expected the 10-year yield to nearly double—going from 2.8% to 5%.

If that happens, long-term bondholders will see double-digit losses in their supposedly “safe” bond portfolios.

Where to Find Income During Income Exodus

Our advice remains steady…

If you’re looking for safe income plays, you can consider buying short-term government bonds. These are bonds that mature in two years or less.

The par value on these bonds won’t decline as much as interest rates rise. That’s because the closer the bond is to maturing, the less its price fluctuates due to changing rates.

Right now, you can get 2.6% on 2-year Treasuries. It’s not a lot, but it beats the 0.1% most large banks are offering on their savings accounts.

If you want to generate bigger returns, you can consider buying closed-end funds (CEFs).

It’s a strategy that Teeka has used over the last three years to sidestep Income Exodus.

Since adding CEFs to the PBL portfolio in 2016, Teeka has averaged realized gains of 18.4%, which beats the S&P 500 by 16.5% during that span. And the yields collected over that time were an average of 300% greater (or more) than the S&P 500’s.


Nick Rokke
Analyst, The Palm Beach Daily