When the Federal Reserve signaled last year that they would begin raising rates, income investors worried that this would be the beginning of runaway inflation. Indeed, many income-oriented investments fell on the news.

Yet, despite the Fed raising interest rates four times in the last 13 months, the current trend of “The Most Important Chart in Finance” remains intact… and that’s good news for income investors.

What is “The Most Important Chart in Finance”? It’s the chart of yields on long-term US Treasury Notes.

We last showed you this chart in September. We consider this to be the most important chart in finance because T-Note yields have been dropping now for more than 30 years. The long-term bull market in stocks, amongst other things, has been fueled by this decrease in interest rates.

Long term chart indicates interest rates hugging trendline
 

Are Interest Rates a Big Deal?

It was a big deal when the Fed said they were going to raise rates and shrink their balance sheet. Very simply, this means the Fed is going to sell the bonds they had bought during the several years of Quantitative Easing after the 2008 financial crisis.

T-Note yields did indeed rise since the Fed made their announcement. As you can see in the chart above, they have not yet broken above the long-term downtrend… and we have reason to believe that yields will not rise much more from here.

One of the reasons we don’t believe that yields will rise much further is that T-Note prices are once again rising. IEF is an ETF that tracks T-Notes. IEF has been rising now for nearly a year and it triggered a new SSI Entry signal just a few months ago.

The Charts

IEF, ETF for 7-10 year treasury note triggers SSI Entry in Sept

When T-Note prices rise, yields fall. Right now IEF is in the SSI Green Zone which suggests higher prices and lower yields ahead.

In addition, our proprietary time-cycle forecast is showing that IEF should continue to rise through the end of the first or second quarter of 2018.

Time cycle forcast suggests IEF should continue rise thru 1Q 2018

All of this is good news for income investments because income investors are going to need to look for higher yields than what T-Notes are likely to offer.

In July, we looked at two income-oriented investments that we thought could be good opportunities – VIG and XLU. Both have done very well since then with gains of 9.7% and 8.4% respectively. That doesn’t even include the dividends received. At current prices, VIG yields 1.69% and XLU yields 3.72%.

There’s another income investment that’s looking good right now – XLRE. XLRE is the ETF for the real estate sector. This ETF was spun off from the financial sector ETF, XLF, a little more than two years ago.

It takes two years of trading history for SSI signals to be calculated. XLRE triggered a SSI Entry signal on its two-year anniversary of trading and is trading solidly in the SSI Green Zone.

XLRE triggered SSI Entry signal 2 months ago

Since triggering the SSI Entry signal two months ago, XLRE has risen a little more than 4%. At its current price, the yield is 2.81%.

The time-cycle forecast for XLRE is also bullish, showing a move higher is the path of least resistance into 2Q 2018. This is very similar to the forecast we saw earlier for IEF. This gives us added confidence in the likely direction of these two ETFs.

Time cycle forecast for XLRE is bullish into Q2 2018
In spite of the Fed’s interest rate increases this year, and their announcement of an additional three increases next year, longer-term interest rates remain subdued. The 30 year downtrend for the “The Most Important Chart in Finance” continues to be relevant for investors looking for both income and appreciation.

The Takeaway

Those looking for income-producing investments are in a much better place today than they were a year ago and it looks as if the next few months will continue to be calm.

And that’s good news for income investors.

Have a good weekend,

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeStops