After the Fed: What investors should do now
US Federal Reserve Chairperson
Janet Yellen speaks during her first news conference in Washington. (AP)
CHICAGO: John Wasik
Published — Monday 24 March 2014
CHICAGO: For active income investors, the next year or so will be
a trying time of tough love. While yields are rising, which depresses prices of
most income-oriented securities, this presents other opportunities.
US Federal Reserve Chairman Janet Yellen has signaled that interest rates may rise as early as next
spring, and the market reacted with force, continuing a pullback that began
nearly a year ago.
Some unheralded optimism lies
behind Yellen's comments that the Fed will end its bond-buying stimulus program
this fall and probably raise short-term interest rates in the spring of 2015.
That bodes well for a number of sectors which benefit from slowly rising rates
and consumer spending.
Economic growth, low inflation and
steady improvement in employment are pushing the Fed to wind down the central
bank's $3 trillion (total) program to buy Treasury securities and keep rates
near zero - a monetary stimulus plan that's been in force since the meltdown of
2008.
What makes sense for investors
now? If you need income and aren't locked into highly rated corporate,
municipal or Treasury bonds that you hold to maturity, you'll need vehicles
that can adjust to rising rates without losing value.
For short-term cash, money-market
mutual funds are flexible because they invest in short-term corporate and
Treasury debt. Their net asset values are fixed at $1. Generally, any bond with
maturities under two years will be least impacted by rising rates.
Rounding out your cash or
short-term income portfolio should be specialized funds that can benefit from
rising rates. The iShares Floating Rate Bond Exchange Traded, for example,
tracks an index of short-maturity investment-grade bonds that have adjustable
rates.
The iShares fund, charging 0.20
percent for annual expenses, is up 0.5 percent for the year through March 19.
That compares to a negative 0.3 percent return for the Barclays US Aggregate
Bond Total Return Index, a benchmark for the US bond market, over the same
period.
Another interest-rate tracking
fund is the PowerShares Senior Loan Portfolio BKLN.P, which has gained 3
percent for the year through March 19. Following an index of senior loans
issued to corporations and partnerships, the fund charges 0.65 percent annually
for expenses.
Despite the cautionary tone of
Yellen's first statement as Fed chief, income markets got the yips after her
pronouncements.
In the wake of Yellen's press
conference yesterday, prices on two-year Treasury notes fell to their lowest
level since 2011. And it's going to be bumpy for any yield-oriented investor in
preferred stocks, real estate investment trusts, high-yield corporate bonds and
most mid- to long-maturity bonds.
John Blank, chief equity
strategist for Chicago-based Zacks Investment Research, predicts the yield on
the 10-year Treasury note could reach 3.5 percent by December of this year, up
from about 2.7 percent recently. That would be a game changer for active income
investors.
"It's been easy money for
bonds for the past 30 years," Blank said.
If the economic rebound in the US continues,
most of the potential upside will be in stocks, particularly companies in
information technology, banks, consumer discretionary and cyclical industries,
Blank predicts.
While US home sales are still sluggish,
likely due to a brutal winter, jobless claims are near a three-month low with
employment slowly improving. If anything, Yellen's comments were a nod to the
growing evidence that the US
recovery is still on track.
Should the recovery continue apace,
corporations will continue to invest in new equipment, consumers will have more
money to spend and increased employment will buoy the economy at large. That
means companies sitting on cash could be spending on technology.
The Vanguard Information Technology
ETF tracks an index of the leading technology companies including Apple Inc.,
IBM and Cisco Systems Inc. The fund charges 0.14 percent for annual management
expenses and has gained 28 percent for the year through March 19.
Consumers feeling flush will
gravitate towards discretionary purchases, home spending, recreation and
entertainment. The Consumer Discretionary Select Sector SPDR ETF follows an
index that includes Comcast Corp., Amazon.com and Walt Disney Co. The fund is
up 29 percent for the year through March 19 and charges 0.16 percent for annual
expenses.
— The opinions expressed here are those of the author, a columnist for Reuters.
Janet Yellen
Janet
L. Yellen is the chair for the Federal
Reserve Board, married to George A.
Akerlof, and a professor emeritus for the University of California,
Berkeley.
Note: George A. Akerlof
is married to Janet L. Yellen, a
professor at the University of California,
Berkeley,
and a director at the National Bureau of
Economic Research.
Christina D.
Romer was a co-director, program in monetary economics for the National Bureau of Economic Research,
the council of economic advisers chairman for the Barack Obama administration, is a professor at the University of California,
Berkeley, and
married to David H. Romer.
Michael L. Nacht
was a professor at the University
of California, Berkeley, and is the assistant secretary
for global security affairs at the U.S.
Department of Defense for the Barack
Obama administration.
John P. Holdren
was a professor at the University
of California, Berkeley, is the White House science
adviser for the Barack Obama
administration, and a co-chair for the President's
Council of Advisors on Science and Technology.
Susan
L. Graham is a professor for the University of California,
Berkeley,
and a member of the President's Council
of Advisors on Science and Technology.
Eric E. Schmidt is a member of the President's Council of Advisors on Science
and Technology, the chairman of the New America
Foundation (think tank), was a
funder for the New America
Foundation (think tank), and a 2008 Bilderberg conference
participant (think tank).
Foundation
to Promote Open Society was a funder for the New America Foundation (think tank), the Brookings Institution (think
tank), the International Rescue
Committee, and Common Cause.
George Soros
was the chairman for the Foundation to Promote Open Society, a contributor
for the American Bridge 21st Century,
and is the founder & chairman for the Open
Society Foundations.
Open
Society Foundations was a funder for the American Constitution Society, and the Tides Foundation.
Stephen M.
Silberstein was a contributor for the American
Bridge 21st Century, and is a benefactor for the University of California,
Berkeley.
David
H. Romer is a senior fellow at the Brookings
Institution (think tank), married to Christina
D. Romer, a professor at the University
of California, Berkeley, and was a co-director, program
in monetary economics for the National
Bureau of Economic Research.
Andrew
S. Grove is an overseer at the International
Rescue Committee, and was a benefactor for the University of California,
Berkeley.
Christopher
Edley Jr. was a governing board member for Common Cause, is a board of adviser’s member for the American Constitution Society, and the
law school dean for the University
of California, Berkeley.
John
A. Powell is a director at the Tides
Foundation, and a professor at the University of California,
Berkeley.
Haas
School of Business is a business school at the University of California,
Berkeley.
Richard
C. Blum is a board member for the Haas
School of Business, married to Senator Dianne
Feinstein, and an honorary trustee at the Brookings Institution (think tank).
Lawrence H. Summers was a trustee at
the Brookings Institution (think tank), the National Economic Council
chairman for the Barack Obama
administration, and a 2008 Bilderberg conference participant (think
tank).
No comments:
Post a Comment