Skip to main content

Sound Advice: June 29, 2022

Higher yields are available, but there’s a hitch. 

After more than a decade and a half of well below average interest returns from fixed-income securities (most are bonds), the pendulum of interest rates is now swinging toward levels that had been considered “normal” over many decades in the past.  Way back when, interest income from investment portfolios that had a substantial portion in bonds was often sufficient, combined with pension payments and Social Security benefits, to provide a comfortable lifestyle for folks in their later years.

Then came the banking crisis of 2007-9 and the Federal Reserve Board, this country’s central bank, plunged interest rates to historically low levels to keep the economy from collapsing.  As rates fell, bond prices rose.  Those who held bonds reaped hefty profits . . . if they sold prior to maturity.  But people who depended on interest income came up short when trying to make ends meet.

Where to go now?  There are a number of choices, none of which is best in class.  They include long-maturity treasury bonds, long-maturity corporate bonds, high yield bonds, preferred stocks, and I bonds.

Long-maturity bonds, whether those of the U.S. Treasury or high-grade corporate issuers, are the most sensitive to changes in interest rates.  The longer the time to maturity, the more their prices will drop when rates rise.  The 30-year T bond now yields 3.25%.  As rates rise, the current price of this bond will fall, which may more than offset the interest return.  That’s equally true of high-grade corporates.

High yield bonds (a.k.a. junk bonds) now have average interest returns of about 8.5%.  Seems interesting, but it’s important to keep in mind that these much lower quality holdings include an increased possibility of default, i.e., the issuer does not make the payments.  The historical default rate for junk bonds was about 3.6%.  Now it’s under 1.0%.  Given that differential, junk bond investments seem like a roll of the dice.

Preferred stocks of quality companies appear to be less risky.  Current yields from preferreds are about 6%, but here too there is substantial exposure to price erosion as the prevailing interest rate environment moves up.  For the year to date, PFF, which is an exchange-traded fund that holds a number of preferred stocks, is off by 17%.

Last, but not least, are I Bonds, which are issued by the U.S. Treasury.  The good news is that the current interest rate is 9.6%, which would be great if you could buy these in quantity, but unfortunately there is a limit.  You can buy up to $10,000 in electronic I Bonds each year and up to $5,000 in paper I Bonds using your federal tax refund (if you are entitled to one).  More information is available at treasurydirect.gov.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 19, 2026

Is AI good news or bad news for investments? AI is potentially very good news for investors—but not automatically good news for every investment . The key distinction is between AI as an economic technology and AI stocks at today's prices . As of September 2026, there are compelling reasons for both optimism and caution: The bullish case: AI spending remains enormous. Gartner estimates global AI spending at $2.7 trillion in 2026 , up 49.5% year over year. If AI produces sustained productivity gains, corporate profits could expand well beyond the companies currently selling AI hardware. The valuation case: Investors have already priced in a lot of success. Valuations of major AI companies are elevated and expected long-term earnings growth is well above historical norms. The spending-risk case: The five largest hyperscalers are expected to spend more than $1 trillion on AI-related capital expendit...
Post a Comment
Read more

Sound Advice: September 30, 2026

Now what? For many women, there comes a time when financial confusion reigns.   It may come after a spouse passes or a marriage goes off the rails.   It’s the same situation for women who never married. The questions are many.   The answers may be few.   Toward the top of the list of concerns is the issue of understanding.   Although there are always complex matters, it’s essential that all of the elements are clearly presented in a straightforward fashion.   There’s more.   Presentation is one thing, but comprehension is another. If there’s a question, it must be asked.   Clarity is the key.   Don’t just say I get it when you don’t.   And, it’s essential to grasp how each of the items fits in the overall situation. In the absence of understanding, no decisions will be made. Here are some of the most pressing questions? What’s the smart way to handle my investments? Where should I go for advice? A bank, stockbroker, attor...
Post a Comment
Read more

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more