Skip to main content

Rising Rates and Their Impact on "Safe Assets"

Image
By
Jason Zweig of the Wall Street Journal wrote an article an interesting article observing in part what happened to certain asset classes investors typically deem safe during the rising interest rates of 1994. During this year the FED raised rates 5 times. He wrote:

"The biggest fear of investors then was that the Fed would tank the markets, which still were recovering from the recession of 1990-91. That didn't quite happen; the U.S. stock market overall earned 1.3% for the full year in 1994.

 But the damage was widespread, hitting supposedly safe and risky assets alike. For the full year, utility stocks lost 15.3%; municipal bonds, 5.2%; emerging markets, 8.7%; intermediate-term Treasurys, 5.7%; the U.S. bond market as a whole, 2.9%; gold, 2.2%. REITs eked out a gain of 0.8%; without their generous dividend yield of roughly 7%, they would have lost 6.4%. (The average yield on REITs today is a bit over 3%.)"

 Most investors don't think that their bond funds can lose money as they did in 1994. This was at a time when 10-year treasury bond yields were north of 5%. These interest payments provided much more of a cushion than today's paltry 2% comparative yields.

Investors may have noticed that May was unkind to bond funds. During the month, the 10-year treasury yield increased by about 0.5% and bond funds suffered -- recall bond prices move inversely from bond yields. The Barclays US Aggregate Bond Index lost -1.78% in May while Vanguard's Long-Term Bond Index Fund (VBLTX) lost -5.32%.

Further, most investors don't believe that their beloved high-dividend-paying stocks, which include utilities, could also suffer more so than the overall market. Zweig notes that the higher yielding asset classes -- utilities, REITs, high dividend paying stocks -- have done well but their valuations may have become overheated. The fact that they have become so increases the risk of a greater reversal.

The FED has publicly stated their intent on keeping interest rates low and has a long-run inflation target of 2%. So today isn't like 1994...yet.

 Click here for the full article, The Japan Syndrome: Rising Rates and Risky Exposures.

Popular posts from this blog

Bangladesh Butter Production Predicts U.S. Stock Returns

By
After reading the title of this post, my hope is that a look of disbelief is cast on your face. Of course butter production in Bangladesh has nothing to do with prediction of US stock market returns. However, through data mining all sorts of 'relationships' can be demonstrated. Many mutual funds, ETFs, and trading strategies are built upon these data mining strategies--most often to the harm of investors that utilize them. As Jason Zweig describes in a recent article in the Wall Street Journal, entitled Data Mining Isn't a Good Bet For Stock-Market Predictions , "The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone . This sham is known as data mining." I recall in from my business statistics course in grad school, how I was able to show that ice cream consumption was correlated to the murder ra
Read more

Don't File Your Taxes Too Soon

By
I'd like to remind everyone to not be too anxious to file your taxes. Many taxpayers rush to file their tax returns as quickly as possible. Ordinarily, that’s fine. But if you own mutual funds, don’t file your tax return before March 1. In past years, revised 1099s were often issued, reclassifying distributions and/or their amounts. This was a huge headache for the investors who had already filed tax returns based on the original documentation. These hapless consumers found themselves forced to redo their returns and file amended tax returns, adjusting the amount they owed or were due in refunds - and paying their tax preparer additional fees to do the extra work. It looks like 2010 may be the same. Therefore, if you own mutual funds, do not file your tax return before March 1. By then, any amended IRS forms are likely to arrive, potentially helping you avoid the hassle and costs of filing an amended return. Kevin Kroskey, CFP, MBA
Read more

Paying for College and Getting Your Money's Worth

By
According to the Student Loan Marketing Association (more commonly known as Sallie Mae Bank), the average tuition, room and board at a private college comes to $43,921. Public tuition for in-state students at state colleges amounted to $19,548 (about half of which is room and board), with out-of-state students paying an average of $34,031. How are parents and students finding the cash to afford this expense? Sallie Mae breaks it down as follows: 34% from scholarships and grants that don’t have to be paid back, coming from the college itself or the state or federal government, often based on need and academic performance. Parents typically pay 29% of the total bill (an average of $7,000) out of savings or income, and other family members (think: grandparents) are paying another 5%. The students themselves are paying for 12% of the cost, on average. The rest, roughly 20% of the total, is made up of loans.  The federal government’s loan program offers up to $5,500 a year fo
Read more