Inside today’s Daily Journal…

Editor’s note: In last Tuesday’s Daily Journal, Distressed Investing analyst Marty Fridson reported that the U.S. government has spent its way into a collapse of the sovereign U.S. Treasury debt regime. He wrote: “It’s not surprising that America’s debt has lost its elite investment status.”

Today, he explains what actions income-hungry investors can take to avoid this coming collapse of the U.S. Treasury bill.

Marty takes it away from here…

As I explained in “The Coming T-Bill Collapse” last week, our elected officials’ financial profligacy has ended America’s privileged status in the global debt market.

In earlier times, investors accepted a lower yield on a U.S. Treasury bond than, for example, on a German sovereign bond for which the Euro-denominated interest payments were swapped into dollars. That was because bond buyers valued the superior liquidity of Uncle Sam’s debt instruments.

But this fortunate state of affairs ended after 2008. And since 2023, the yield comparison has even turned unfavorable on the government’s shortest-dated issues, known as T-bills.

This is a serious problem for the U.S. government – it can’t afford the extra interest cost imposed by losing the laurels for being the most-admired sovereign borrower.

So what’s an alternative?

Income-seeking investors don’t need to limit their sights to U.S Treasuries. To mention just one available alternative, over the past 25 years BBB-rated corporate bonds have yielded 2.28 percentage points more, on average, than U.S. Treasury bonds, as measured by the respective ICE BofA Indexes.

An even better approach is to diversify across several income categories. Here’s why.

Conventional Treasury bonds basically represent a pure play on interest rates. When rates go up, their prices go down. It’s also true that Treasury bond prices rise when yields go down. But the key point is that if you concentrate your fixed-income portfolio entirely in ordinary Treasury bonds, you’re taking on 100% exposure to a single factor, the direction of interest rates.

That didn’t work out so well between July 2020 and October 2023. Over that three-year interval, the benchmark 10-year Treasury yield shot up from 0.54% to 4.91%. The ICE BofA U.S. Treasury Index lost value at an 8.19% annualized rate over the period. Even taking into account interest they received during the period, pure Treasury investors lost money at a painful 6.32% annualized rate.

Ouch!

Porter & Co.’s Income Streams service – which falls under my Distressed Investing advisory – points to a smarter way to generate investment income. In Income Streams, we recommend an ETF in each of eight categories – BBB corporate bonds, high-yield bonds, preferred stocks, utility stocks, dividend growth stocks, closed-end funds, master limited partnerships (“MLP”), and real estate investment trusts (“REIT”).

An equally weighted portfolio of these eight ETFs significantly cushioned the downside during that July 2020-October 2023 span. The diversified ETF income portfolio sustained just a 0.68% annualized loss versus the Treasury index’s 8.19% annualized price erosion. And taking into account the interest payments, dividends, and distributions received during the period, owners of the diversified ETF portfolio would have enjoyed a 3.98% positive annualized return.*

Contributing to that result was a staggering 30.08% annualized return on the MLP ETF. It benefited from a doubling of the Brent crude oil price per barrel, from $43.30 to $87.41. So while the Fed was hiking interest rates to combat soaring inflation, a diversified income portfolio was actually profiting from a major component of that inflationary spike.

Other ETFs in our recommended array of income investments are not entirely at the mercy of upsurges in interest rates. For example, high-yield corporate bonds thrive when the economy booms, exactly when increased demand for investment capital typically drives up interest rates. The ICE BofA U.S. High Yield Index registered its best year ever in 2009. As the recovery from the Great Recession began, “junk bonds” posted an astounding 57.51% total return. The Treasury Index’s return for that year was negative 3.72%.

But wait, there’s more!