Last month, Fed Chairman Alan Greenspan sent the Treasury bond market into a tailspin by making a subtle semantical adjustment in the wording of the Fed’s policy statement.
The Fed was no longer pledging to keep short-term interest rates at 1% for a “considerable period.” Instead, it pledged to be “patient in removing its policy accommodation.”
Although we called this a difference without a distinction, it provided ample grist for the financial media mill.
The talking heads declared this a benchmark change in the country’s interest rate structure and were heralding the long awaited new era of rising inflation and higher interest rates precipitated by a strengthening economy.
Avoiding the short-term noise
Now, a little over one month down the road, you can understand why we urged long-term income investors to resist the temptation of trying to time the market based on the short-term noise emanating from the so-called experts who still can’t distinguish between traders and investors.
Since last Friday’s dismal employment report, bond prices have surged and yields have plummeted to levels not seen since July. At this writing, the 10- and 30-year Treasury bonds are yielding approximately 3.75% and 4.70%, respectively.
Investors who decided to wait for higher rates before committing funds to the bond market are finding the “cost of waiting” to be increasingly prohibitive.
As we have said before, we expect this lower interest rate environment to persist well into the future despite most economists’ predictions to the contrary. In fact, one of the reasons we continue to think so is the overwhelming consensus of experts forecasting higher rates.
In February, Barron’s reported that Merrill Lynch’s Global Fund Manager survey showed 87% of fund managers believed long-term rates would be higher a year from now, while a meager 4% predicted they would be lower.
In our experience, whenever Wall Street soothsayers are this much in agreement on anything, the best bet is to go the other way. (By now, we don’t have to point out the success rate of monthly predictions calling for robust job growth.)
Further, over the past six months, it has been almost impossible to find a financial publication that is not insisting that traditional bond investors should eschew the long-term bond market, shorten maturities and load up on TIPS (Treasury Inflation Protected Securities).
Now that TIPS are being recommended by almost every broker and financial advisor in America, we are becoming increasingly confident that “looming inflation” will also not be a concern for the foreseeable future.
Unfortunately, TV economists and pundits are rarely held accountable for their advice. In fact, it would be helpful if they archived their thoughts for easy reference later.
The simple approach
We take an entirely different view – boring, simple and timeless. It makes for bad theater but happy investors.
Cash is not king! Commit your tax-free bond market dollars to the market when they are available.
Forget market timing! Purchase good quality bonds and maximize your tax-free income on every purchase. Insured tax-free bonds can still be purchased to yield 4.75% to maturity, which is comparable to 7.30% on a taxable bond for an investor in the 35% tax bracket.
And while the pundits espouse the imminence of rate hikes, we, on the other hand, wouldn’t be surprised to see them fall before they rise.
In the meantime, keep your interest clock ticking.
