June 3, 2018 Fixed Income

Risk/Reward Vol. 394

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

It has been a few weeks since last I published and for the next several weeks, publications will be irregular. It is summertime after all, and the livin' should be easy.

More yeah/boo in the stock markets as the S&P and the Dow continue to trade, year to date, within a plus or minus 2% range. The NASDAQ, fueled by some great tech companies (Apple, Alphabet, Netflix, Amazon, etc), is up nearly 10%. This week a great jobs report (unemployment now at 3.8%) helped salvage a market that was hammered by some disturbing news from Europe---the failure of Italy to form a government. But as I have preached over the past few months, keep your eye on The Donald. As he goes, so goes the market. It has been true since the day he was elected. Frankly, Trump's unpredictable nature has made equity investing unappealing to me.

What has appealed to me has been short term fixed income. I continue to look for insured or investment grade fixed income securities (CD's, US Bonds, agency bonds and/or highly rated corporate bonds) with durations from 6 months to 2 years. My average yield is over 2.5% with the 2 years at 2.8% or above. Barb has locked into some three years that are paying at least 3%. I would join her but for my belief that interest rates will be heading up. This belief took a hit this week as the Italian political crisis and reports that several huge European banks remain undercapitalized caused a flight to the safety of US Treasury securities. Such flights increase bond prices and depress their yields. The US Ten Year is now yielding below the psychologically important 3% level and the 2Year has dropped below 2.5%. And not even the stellar jobs report of last Friday could increase the odds that a fourth Fed Funds rate increase will occur this year. That likelihood is now below 40% after having been as high as 55%. That said, with the economy hitting on all cylinders, the need for more government debt to fill an anticipated revenue shortfall and the Fed no longer serving as the bond buyer of first resort, one would expect interest rates to go up. If they do, Barb and I will be buyers.