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Interest Rate Environment 2013-2023

|Includes:AGNC Investment Corp. (AGNC)

Samuel Clemens said "History doesn't repeat itself, but it does rhyme". Doesn't it seem uncanny that in the aftermath of the Great Recession, we find political economics to appear similar to the prelude to World War II? I believe this phenomenon is related to the Generations as defined by Strauss & Howe.

In the middle of last year (2013), the Federal Reserve mentioned tapering of its bond buying program and immediately, the 10 year treasury bond interest rate rose from its low of 1.61% to over 2%, culminating in 3% by the end of the year. When this abrupt change occurred, high-yield stocks and REITs dropped in price anticipating a loss of spread between what they could borrow at and what they could make purchasing assets. This was similar to 1941 when the 10 year bond rate bottomed. After that the next 10 years saw a range-bound 10 year treasury bond interest rate of ~2.5%. During this time there was a considerable need for government financing of World War II and its aftermath. I contend that we are seeing the same process today.

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10 year treasuries 1926-2011

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With this benign setting, I believe REITs and other high-yield instruments will prosper at least until 2017. The spread will be reduced as the Fed finishes tapering and begins to raise the short term Fed Funds rate, but even that will be a slow process. I will maintain 25% allocation to bond-like investments that pay high-yield during this period. This will counteract the gyrations of War talk and economic collapse of emerging markets.

Disclosure: I am long AGNC, MTGE, LNCO.

Stocks: AGNC