Generous Bond Yields Prove There Is an Alternative to Stocks

By Randall W. Forsyth: [email protected] Feb. 17, 2023




Excerpt follows...

Five percent is a risk-free rate far above what anyone under the age of 40 likely is accustomed to.

...With two more quarter-point hikes likely in March and May, and possibly a third in June, T-bills due in six months topped the 5% mark this past week for the first time since April 2007, according to the St. Louis Fed.

The rise in short-term money-market yields has significant implications beyond letting savers earn a decent return again.

In fact, T-bills are providing roughly three times the S&P 500 dividend yield of 1.65%, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Given the yield gap, David Kotok, Cumberland Advisors’ CEO and chief investment officer, says he has a very high 25% cash position in his clients’ portfolios of exchange-traded equity funds.

As for municipal bonds, one of Barron’s income picks for 2023, they have rallied strongly since the turn of the year. That’s the good news. The bad news is that their prices have climbed, lowering yields for anyone buying now.

But longer-term munis, with yields of 4.50% for mid-investment-grade credits, are still attractive, says John Mousseau, director of fixed income at Cumberland Advisors. That would be equivalent to approximately a 7% taxable yield for an investor in the 35% bracket, far above the federally taxable 3.90% yield on a 30-year Treasury. And he sees further Fed rate hikes resulting in a negatively sloped yield curve (with short maturities above longer ones), ultimately hitting stocks and sparking a large rally in bonds.

In contrast, Charles Lieberman, chief investment officer at Advisors Capital Management, thinks that rates will head higher. He prefers maintaining shorter durations for clients and favors real estate investment trusts with exposure to healthcare.

For the near term, Treasury bills yielding upward of 5%, with no risk and exempt from state and local income taxes, still are tough to beat.


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David R. Kotok & John R. Mousseau
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