No. of Recommendations: 6
Interest rate fears have driven medium and long term yields to new highs in more than a decade: 30 year mortgages shot to 7.8% and 10 and 15 year mortgages rose to 6.9%. Krugman says: "Goodbye inflation fears, hello unsustainable debt" and comments that real interest rates offered by long bonds seem to have climbed to 2% in his recent Wonking Out newsletter column for the NY Times:
https://www.nytimes.com/2023/09/29/opinion/natural...Krugman notes that the climb of long bond yield seems to be a capitulation by the bond market, accepting that the Fed will keep interest rates higher for longer. At the same time, however, inflation seems to be coming under control:
What we've seen, however, is so-called immaculate disinflation as the economy works out its pandemic-era kinks. The Fed's usual measure of underlying inflation ran at only 2.2 percent (annualized) over the past three months, essentially back to its 2 percent target. And the latest data from the euro area suggest that immaculate disinflation is spreading across the Atlantic.Bonds look more attractive to me than they have in years. 5 and 10 year treasuries are yielding 4.6%, 30 years are at 4.7 (ending one of the recent periods of rate inversion for 30 year vs 5 year rates, at least for now) If inflation trends back down to the 2.5 or less range we'd seen for the most part for a long time, as the Fed intends, then real returns for the 30 year treasuries look good too, with price appreciation also potentially coming into play if rates drop going forward.
It's a fools game betting on the direction of interest rates, but for the first time in a quite a while yields are attractive at variety of durations. With a Vanguard Federal Money Market Fund yielding 5.3% and inflation seemingly on track to fall below 3%, cash in a good money market fund like that one, or some moderate investments in bonds of varying duration look to have a positive return in the short and long term.
Not that I have much of my and my family's investments in these instruments at the moment, but I'm sure a lot of people who prefer to have a sizable percentage in cash/fixed are feeling better about their investments. My favorite idea of the moment is small cap value, like Vanguard Small Cap Value ETF (VBR) yielding 2.2% with substantial growth of the real stock price likely over the coming years.
