The Fed doesn’t care about fixed income investors. Stark as that may seem, it’s true.
Since 2008, the Fed has manipulated interest rates to near zero percent, thereby depressing the yields on fixed income investments like bonds (NYSE:AGG) and savings accounts. And the Fed’s extension of Operation Twist through the end of this year is more of the same.
Here’s the translation: Savers are being penalized, speculators are being rewarded.
On June 1, the yield on 10-Year Treasury (NYSE:IEF) notes fell to a record low of 1.43%.
The best 7-day yield on a retail money market fund (NASDAQ:FSLXX), according to Crane Data, is a paltry 0.10%. Tax exempt money funds (NASDAQ:MOFXX) yield slightly more, but mounting municipal credit risk has everybody but Paul Krugman rightly on edge.
A top yielding 5-year certificate of depression (CD) will snag you around 1.69%. At that interest rate, it’ll take you approximately 42 years to double your money.
As a result, conservative income investors, at a record rate, are piling into volatile but high yielding asset classes like junk bonds (NYSE:HYG), preferred stock (NYSE:PFF), exotic emerging market debt (NYSE:PCY) and other high risk areas they wouldn’t have dreamed of touching in past years. The net cash flow into HYG, which tracks low rated corporate bonds, has more than doubled over the past year!
History doesn’t always repeat itself, but it often rhymes.
People who chased yields in highly leveraged mortgage REITs (NYSE:REM) got crushed when the group collapsed by 42% in value in 2008, not to mention the wave of dividend cuts they suffered. Before that time, mortgage REITs were sold as a reliable source of income.
Here’s the message: Investors better come up with a better game plan for generating adequate income. You don’t necessarily need to take more risk, but rather, you need to look in the right places.
By using the right combination of ETFs, options, and dividend income, getting better monthly cash flow is possible, despite the Federal Reserve’s monetary nonsense.