Third Quarter, 2023
Gimme Five… Or Maybe Not??
Gimme five…or maybe not? Investors are feeling the allure of locking in a guaranteed 5% or more right now. At the writing of this letter, the Federal Reserve has increased its Fed Funds rate 12 times since March 17, 2022, and signaled the possibility of one more rate increase of 25 bps at their next meeting in October. That would put money market rates at 5.5% at Schwab.
As of September 29, 2022, Fed Funds rates are at highs not seen since June 29, 2006, and investor choices that seem “risk-free” are:
- Schwab Value Advantage money market yielding 5.24%* variable with Fed funds rate.
- Lock in 5.04% to 5.45% in US Treasurys that mature from 3 months to 2 years.
- Schwab Bank CDs at 5.51% to 5.75% for maturities from 1-3 months to 10-18 months.
- Yields do not include any fees or commissions you may be required to pay.
So why not lock in 5%+ in these seemingly “risk-free” options? What happens when rates drop?
- Money market funds will adjust their rates down as the Federal Reserve lowers rates.
- When your Treasurys mature, you will have to reinvest at lower rates.
- You can miss out on a bond market rally as the Federal Reserve begins to lower rates.
- In the past six rate-hiking cycles, corporate bonds outperformed cash, up +36% versus +17% in the 36 months after the last Federal Reserve rate hike.
What is an alternative to avoid reinvestment risk? A W&A actively managed diversified portfolio of bond mutual funds which, as of September 29, 2023, yields 5.36%* with an overall discounted price of $88.40 that can amortize to 100 par if held to maturity, and holds 25% cash to invest opportunistically during this period of uncertainty.
We believe the best of both worlds for balanced investors – a W&A bond mutual fund portfolio appropriate for your longer-term needs to provide current income with historically less volatility than stocks, and then use money market, Treasurys, or CDs for your short-term cash needs.
*Current yield refers to income earned on the current portfolio and does not include capital gains or losses in its calculation. Current yield is different from the actual total return an investment will receive. A client’s total return is the actual rate of return on an investment since it includes both income and appreciation. The current yield can vary if bonds in the underlying funds change.
Sources include: Investment News; Forbes Advisor; Charles Schwab Advisor; Bloomberg; FactSet; Y Charts
Author: Senior Vice President Senior Wealth Strategist
Phyllis had been associated with W&A for a number of years before joining the firm, acting as a consultant to the company in its formative stage and subsequently as a client.
Prior to joining W&A, Phyllis served as Vice President, Corporate Finance at Morgan Keegan & Company, Inc. She was involved in all aspects of its investment banking activities, including mergers and acquisitions, valuation studies, and initial public offerings. She earned registrations in NASD Series 7 (Registered Representative) and Series 63 (Blue Sky).
Phyllis holds an MBA in Finance as well as M.Ed and BBA degrees from the University of Memphis. She is a Chartered Financial AnalystTM(CFA®) and a Certified Financial PlannerTM(CFP®) Licensee. She is past-Chairman and past-President of the Mid-South Society of the Financial Planning Association (FPA) and served on their Board of Directors from 1995 to 2000. During her term as President in 1998, the Mid- South Society of FPA was chosen the Outstanding Society of the Year by the national FPA organization.
Her community volunteer activities include MIFA and the Women’s Foundation for a Greater Memphis, where she served as Treasurer, Chair of the Finance Committee and currently chairs the Investment Committee. She also serves on the Board of Governors of The Seaside Institute in Seaside, FL.