With the U.S. government failing to reach agreement on budgetary issues and on raising the debt ceiling, there is considerable discussion of what this would really mean. From what I have read, the issues are quite straightforward. If the U.S. government does not raise the debt ceiling, the Treasury will not have sufficient funds available to meet all of its obligations, starting sometime in mid-October. For the time being, many government workers have been furloughed and services suspended. Continue reading
The yield of an asset is a key component of predicting future returns. This is true for the yield on Treasury bonds as well as the dividend yield for stock indexes. The yield on aggregate bond indexes is considered a good proxy for future expected returns. The dividend yield of broad stock indexes has been shown to provide significant value in predicting future stock index returns. In both cases, low yields tend to predict high future returns, and vice versa. These arguments that yields predict returns are not without critics, especially for equities. Continue reading
I have been struggling to understand a problem that I am going to refer to as the ‘yield paradox.’ Yields for individual asset classes look low. The 10-year Treasury bond is yielding about 1.9%, and 30-year Treasury bonds are yielding a similarly paltry 3%. The S&P 500 is yielding 2.1%, which is very low by comparison to historical levels. Investment-grade corporate bond indexes are yielding less than 4% (see LQD, for example, at 3.8%). Given that the official rate of inflation for 2012 was 1.7%, these yields mean that investors are getting very little yield net of inflation. The very low yields on bonds and on stock indexes is a direct result of the Fed’s actions in holding interest rates at historical lows via Quantitative Easing. We have not yet gotten to the paradox. Continue reading
Availability of timely data is at the core of effective financial and economic analysis. The Federal Reserve Economic Database (FRED) provides a vast array of economic time series via an intuitive graphical interface. If you want to get a read on the U.S. economy, FRED is an outstanding resource. The ability to quickly create customized charts makes it quick and easy to examine a wide range of data. In this article, I am going to show a number of these charts, while exploring the overall economic U.S. economic picture. Continue reading
Municipal bonds are issued by states and municipalities and typically have tax advantages relative to other fixed income assets. In general, income from muni bonds is tax exempt at the federal level and at the state level for investors living in the issuing state. Municipal bonds have historically been favored by investors in high tax brackets who, of course, derive more benefit from the tax exemptions by virtue of being in the highest tax brackets. Continue reading
Today, the yields on ten-year Treasury bonds are at a fifty-year low, and no period prior to the last few years reflects yields that even come close. From 1962 to 2005, the lowest the 10-year Treasury bond yield ever got to was just below 4%, more than twice the current yield.
The chart below shows how unusual our current environment is. The vertical axis is the yield from 10-year Treasury Bonds and the horizontal axis is time and we are looking at a period from 1962 to present. From 1980 to today, we have seen the yield of 10-year Treasury bonds go from about 12% per year to below 2%. The 10-year Treasury yield is considered a benchmark measure of bond yield and interest rates. The Fed funds rate and the 10-year bond yield are very closely tied to one another. For another illustration of how interest rates, the Fed funds rate and 10-year bond yield are related, see here. Continue reading
In Part I of this article, I explained why I have issues with the traditional idea that individuals should provide for their required level of retirement income (beyond what is provided by Social Security and any pensions) entirely with assets with zero risk of loss of principal (e.g. Treasury bonds). In Part II, I discuss the alternative approaches.
There are two investments that have zero loss of principal: traditional Treasury bonds and Treasury Inflation-Protected Securities (TIPS), which are Treasury bonds with embedded protection against inflation.
I agree with the notion that people need to save and invest so as to be able to provide a very reliable and consistent income stream in retirement. Zvi Bodie has presented a compelling argument that investments in stocks do not become less risky as you hold them for longer periods, so that investors cannot rely on stocks as part of their required income stream. I have performed detailed analysis of Bodie’s argument and I agree with his argument: the magnitude of loss that you can face with an equity-heavy portfolio increases the longer you hold the portfolio. As I noted in Part I, William Bernstein has recently advocated for a portfolio in which all of your required income is provided by Treasuries and annuities, largely consistent with Bodie. Continue reading
Portfolio Income: The Trouble With Treasury Bonds
The current economic environment is making it very hard for investors to generate reasonable levels of income through traditional means such as bond ladders. While it is always dangerous to suggest that ‘it’s different this time,’ I believe that we are facing some unprecedented conditions that require new approaches. Income-seeking investors with low risk tolerance—those who have traditionally favored government bonds—are in the most difficult situation.
The problem of low savings and investment rates in the U.S. is huge. I have written about this in the past, along with many others. Every study on retirement savings notes that Americans need to save more. Having the ability to support yourself from a portfolio of savings is not, however, just about the amount that you save. There is also the issue of how much income you can derive from each dollar in your portfolio. Today, with historically low yields on government bonds, retirees and others seeking to live on the income from low-risk investments are faced with an enormous challenge that compounds the savings rate problem. To be able to live on the income provided by very low-risk investments, the necessary savings rates increase dramatically relative to savings rates when investors are willing to bear some risk. Continue reading
Stock investors generally don’t have much to fear on Friday the 13th. Historically, Friday the 13th is a relatively calm day for stocks. Jason Zweig, who writes The Wall Street Journal’s Intelligent Investor column, says it’s usually a good day for investors and says superstition about trading on this supposedly unlucky day is one of the market’s “dumbest myths.”
Bond yields, however, are seriously worrying to Geoff Considine. Here’s why. Continue reading
One of the recurring themes in the financial press in recent years is a warning to income-oriented investors not to pile into dividend-paying stocks to boost portfolio income. The Wall Street Journal has a recent article on this topic titled, “Why Dividend Stocks Aren’t the New Bonds.” This article is motivated by the fact that $17 billion flowed into equity-income funds in 2010 even as $80 billion flowed out of U.S. equity funds.
The arguments made by the WSJ article are similar to those in a November 2011 blog post by Vanguard’s Chief Economist, Continue reading