From the Desk of our Investment Policy Committee:
Learn about how changes in interest rates can provide an interesting alternative for both Savers and Investors.
Interest rates have moved up enough recently to provide both savers (those who are primarily concerned with capital preservation) and investors (those who invest for some combination of capital preservation and appreciation) with a reasonable alternative in the financial marketplace. For the first time since February 2008, the U.S. 90-day T-Bill is yielding more than the dividend yield of the S&P 500, 1.91% compared to 1.89%, respectively. For comparison, this time last year the 90-day T-Bill was yielding 0.88%.
As a result, for the first time in more than 10 years, savers are finally earning a yield similar to that of large cap equity yields. In addition, if the Federal Reserve follows through with their plan for three more interest rate increases in 2018, investors can exercise patience in finding longer term investment opportunities because they are getting paid for parking their money in shorter term money funds, CD’s or Treasury investments.
A downside to the rising interest rate environment is that existing fixed income positions will be expected to go down in value as interest rates move up. For those invested in individual bonds that are held to maturity this is not a significant issue because you will expect to receive the face or par value of the bond regardless of the intervening price volatility. However, for those invested in bond mutual funds or exchange traded funds (ETFs), the return is less certain as there is no maturity dates on bond fund shares and the value of the shares depends on a number of factors that are not in the owner’s control; interest rate changes, the performance of the underlying mix of bonds in the fund, the timing of the purchase and sale of the underlying bonds, and the timing of the purchase and sale of the fund’s shares by other investors.
If you would like to have your fixed income portfolio reviewed please contact us at 417-450-4797.