Halls of Shrewd'm / US Policy❤
No. of Recommendations: 1
With interest rates going down I noticed the SEC yield is down to 3.75%. That is the yield I use. I was thinking funds like IUSB and FBND, would be better because as interest rates go down prices go up, so I probably would not lose money buying those funds.
Thoughts?
No. of Recommendations: 1
Mark, you don't need to post the same thing on two different boards.
No. of Recommendations: 14
With interest rates going down I noticed the SEC yield is down to 3.75%. That is the yield I use. I was thinking funds like IUSB and FBND, would be better because as interest rates go down prices go up, so I probably would not lose money buying those funds.
If/as longer dated rates fall, longer dated securities will rise in price.
The problem is that the current prices for everything along the yield curve already include the market's consensus view of the future trajectory of rates at every duration. You'll do extra well by choosing one duration over another only if your insight into the trajectory is more insightful than the current consensus...a very tough hurdle : )
Better to simply pick the duration that matches how long you think you'll want your money ticking along in fixed income.
Jim
No. of Recommendations: 1
15 boards would be crazy, but you get different people on the two boards, so therefore, more answers.
No. of Recommendations: 0
I'll attest to that. Thought I was being smart when I bought into TLT and UTWY around the .5% announcement, even before. They promptly dropped 4 to 5% in price.
They were already discounting the IR drop.
Oops.
No. of Recommendations: 0
I'll attest to that. Thought I was being smart when I bought into TLT and UTWY around the .5% announcement, even before. They promptly dropped 4 to 5% in price.
They were already discounting the IR drop.
I never would have thought that, but it makes perfect sense. Award 1 point for Efficient Market Theory.
e
No. of Recommendations: 0
They were already discounting the IR drop.
That's what Ken Fisher has been drumming on about for at least the 25+ years I have been reading him.
"The market discounts all know information. By the time you hear about something, it is already priced in."
No. of Recommendations: 20
Other than T-bills, nothing is cash other than cash. One should never reach for yield if you want something cash-like.
However, if you are interested something further along the spectrum towards fixed income, one thought:
The inflation spike is now over. The security discussed here before, WFC/PL, is now looking not so shabby. It is essentially perpetual, but it's not inflation protected, so both your capital (if you sell) and your coupons erode with inflation. However, with US dollar monetary inflation now under control, that's not as big an issue as it was.
Sample calculation: Current MCT inflation is 2.57%. Let's say you think that's about what it will be for another couple of years.
Three year treasuries are yielding 3.89%. Subtract the 2.57%, and that's a real return of 1.32%/year.
WFC/PL is trading at $1261.21 and offers $75 in coupons, so that's a nominal yield of 5.95%. Subtract the 2.57% of anticipated inflation and that's a real return of 3.38%, about 2%/year higher. The disadvantage is that you don't know what the market price will be at any particular future date. The range is not usually too vast, though, other than during the credit crunch...even with the pandemic and the inflation spike, the market price has been in the $1060-1490 range 90% of the time since Jan 2011. Today's price is very close to the average since then.
The past is not a reliable guide to the future, but as an example, it was trading at $1200 a decade ago. Nominal yield on that purchase price was 6.25%. The modest price change and value erosion using CPI inflation meant a real capital loss of -2.27%/year. After accounting for inflation, the yield has averaged a real 5.45% on the purchase price. The sum of those, a quick estimate of the real total return for the last decade, comes to inflation + 3.18%/year ending now. Quite a bit better than 10 year TIPS which were yielding inflation + 0.41% ten years ago.
Jim
