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From Fidelity:For investors looking to actively position their portfolios in anticipation of a turn in rates, here is a look at 5 asset classes and investments that have historically performed well when rates fall. Of course, past performance is no guarantee of future results.
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Anybody else lengthening the duration of their bonds? With what vehicles?
While High Yield has held up I am getting more cautious here too
I’m trying to get my head around where to cull a little risk without dumping any apples out of the cart. Have a substantial TOD position in PRHYX (short-term muni junk fund). I’d have expected to have spent that on a new vehicle or home infrastructure by now - but haven’t for various reasons. I’m thinking next week I may move a good portion of that into SPAXX (money market fund) as a quality upgrade to my fixed income posture. (All 3 accounts, TOD + 2 IRAs, are considered as one for allocation purposes.)
If things get any crazier next week I might even move a bit of IRA cash into SPDN (2X inverse S&P) as a downside hedge. Prefer that to selling out of any major positions because I think they are good long term holds and not nearly as “bubbly” as the major indexes. I’d liken the froth atop them to be more like the head of foam on a stein of good beer. (Don’t dump out the beer because of the froth.)
My fixed income funds now (aside from cash):
- PRIHX
- WEA
- LSST
- CVSIX - Arbitrage fund / Seeks to produce bond-like returns with lower volatility
Currently, though the yield curve is largely inverted, at least you're getting a little risk premium with longs over intermediates.
https://www.ustreasuryyieldcurve.com/
Pushing on a string may not be the best metaphor, but the Fed pushes on the short end of the curve. That end has a lot of room to go down without long end yields necessarily dropping.
10 year Treasuries are still under 4%, while their long term historical average is 4.25%. There's not much room for 30 years to drop in yield if they're going to stay above 10 year rates. 30 year Treasuries are now also below their historical average of 4.74%.
We've already seen a drop in 30 year rates. Mortgages have dropped half a percent percent in the past month and are not expected to decline further this year, even with an anticipated Fed rate cut.
https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/
All of this is not to say that long term rates won't drop a lot more. Or they might not. When and how much are also open questions.
Me, I'm sticking with intermediates. Win a little, lose a little, they offer more stability as backup for cash in the 3-7 year timeframe.
Side note: I suspect that cap gains on Treasuries are not state income tax exempt. While I have been unsuccessful in finding writing one way or the other, there are many sources documenting the fact that cap gains on muni bonds are state taxable. ISTM the situations are analogous.
I’m a very reluctant bond investor. Have no way of predicting the trend. Lived through 20% interest rates in the 70s or 80s. A sobering experience. I’d rather trust the manager of a broadly diversified multi-asset fund to make the bond call. He / she may not know either. But better equipped to make the call than I am.
Made a killing on that... bonds out of Utah (Mormons) to build a huge electric generating facility at Four Corners. Terrific income until they were called a couple of years later. It wasn't until fairly recently that I became aware that I had helped build an enormous coal-fired generating complex. Who knew?
Photo caption: ”President Ronald Reagan ordered Federal Reserve Chair Paul Volcker not to raise interest rates. It didn’t work.” (Barron’s, August 19)
Fed funds rate (blue) vs. CPI Y/Y (inflation; red)
30 year yields (blue) did not follow Fed funds rates (red) down for almost a year.
Nor did they fall with inflation. https://ou.edu/content/dam/cas/economics/Student Journal of Economics publications/Derrick Jones_VolckerJOE.pdf
30 year yields (blue) vs. CPI Y/Y (inflation; red)
In 1987, rumor went both ways - one was that Volcker didn't want a 3rd term, and another that Reagan wasn't going to nominate him for the 3rd term, had a search setup for possible replacement that was headed by Greenspan. The politician that Greenspan was, he recommended reappointing Volcker, but Reagan nominated Greenspan instead.
Two months into Greenspan's term, stock market crashed on 10/19/1987 (Black Monday). It had more to do with dollar and some harsh statements that the US Treasury Secretary Baker made about Germany and the US allies.
BTW, as reported by various sources, it was Baker who said to Volcker that the President was "ordering" him to lower rates. Reagan (who was present) and Volcker didn't say anything. Volcker left the meeting without reacting to Baker's "order".
*Nominated by Carter
**Nominated by Reagan
After that, Templeton Growth was my first mutual fund investment through my account executive at a local Prudential-Bache office.
No internet/online brokerages yet and no-load mutual funds were just beginning to gain traction.
Wasn’t all happy. Especially shopping for groceries in the big stores in the northern (Detroit) suburbs. There were always several employees moving up / down the aisles marking items up by hand. No bar codes in those days. Things went up fast. The loaf of bread you paid 50 cents for became 60 cents a few weeks later and 75 cents by year’s end. On and on it went. Not only bread. Meats, staples, everything rising. Year after year. So, after paying federal income tax on your 20% “windfall” you were lucky to end up ahead. Fortunately unions were strong and protected workers with COLA wage raises. To some extent, non union workers benefited indirectly.
This source shows annual inflation peaking around 18% in 1980 and remaining in double-digits for several years.
I didn’t sense as much angst among the public back then over rising prices as today. But maybe I wasn’t looking or listening. I think it came on gradually over many years and people got used to it. They say if you put a frog in a pot of cold water and heat it up to a boil slowly the frog will die of the heat rather than jump out.
Inflation is expressed in annual change of price. If inflation goes up from 17% in one year to18% inflation the next year, people will know they are paying 18% more in price than what they paid the previous year. Not sure how people can get used to it.
It is possible your memory is kind to previous generations or the current populations are more whiny - you have to figure that out for yourself.
what was the psychology of retail investors then towards 10, 20, and 30 yr Treasuries when those yielded nearly 15%? With no risk of being called, were retail investors hoovering these instruments? If not, why not?
Were people really thinking of 12-15% inflation into perpetuity?
I get that markets move much faster now.
Never did any sailing on a real boat. But hoisted a few beers to The Sloop John B which came out in ‘68 while in college. The linked video is of poor quality, but sound is pretty good. May have been recorded surreptitiously. But greatful someone recorded a part of our music history.
- Well, the conventional wisdom is to lengthen out maturity bit. If I wanted to put a lot of $$ into bonds I’d aim for around 3 years maturity. Farther out is a gamble if inflation reignites.
- Two short term ETFs: I use LSST for a short term bond fund. There are lower fee options if that’s critical to you. On my radar is TDTT which adds an inflation-protection component - also about 3 years maturity. Very low fees.
- For more conservative folks an ultra-short might get you a bit extra as rates fall. TBUX looks excellent in that category.
- I’d say keep your inflation hedges up. Lower rates may eventually push it higher.
- There’s an old expression: “Buy the rumor. Sell the news”. The presumption is that stocks will go even higher if the Fed cuts rates. Maybe yes. Maybe no.
- The financial world may look much different following the November election. Enjoy the fun for now. Hope it lasts a couple more months. But don’t get too giddy.