The rise in interest rates is depressing bond prices but also creating opportunities for investors who have been starving for yield and worried about a stock market correction.
They can now collect more yield in a riskless 6-month Treasury bill than in many dividend paying stocks. The 6-month T-bill was yielding 2.08% as of Friday’s close, well above the 1.91% dividend yield of the S&P 500, which has gained just 1.47% year to date. And many one-year CDs are paying between 2.15% and 2.25%, according to Bankrate.com.
“We have been advising clients to get surplus cash into CDs, since we are seeing CD rates north of 2% on 18- to 24-month CDs,” says Leon LaBrecque, managing partner and CEO of LJPR Financial Advisors in Troy and Flint, Michigan. “On our individual bond portfolios, we are staying short as well.”
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David Demming, president of Demming Financial Services, an independent financial planning firm in Aurora, Ohio, noted that two of the firm’s favorite hybrid money managers — FPA Crescent and IVA Worldwide, which invest in stocks and bonds — are now holding about 40% in cash and only about 2% in bonds, rather than usual 20-30%.
“We have, as have most of our asset managers, dramatically shortened our maturities or simply reduced bonds entirely from from our portfolios.”
During periods of low inflation, like the last nine post-recession years, bonds have served as a hedge against volatility in the stock market. But now that inflation is rising, the “balance of risk is changing,” says Mihir P. Worah, chief investment officer, Asset Allocation and Real Return, at Pimco, who spoke at a recent Fixed Income Market Structure Seminar held by the Securities Industry and Financial Markets Association. “Bonds will not help to hedge equity holdings … In the absence of a recession there is a negative correlation between stocks and bonds.”