Weekly Observations for 5/4/2018 — Update on Yields

There was no change in the stock market this week following my observation last Friday that the market is just bouncing along the 200-day average in a tightening range. Although stocks are up sharply today, so far it’s just another lower bounce off of the same line:

The stock market will develop an interesting trend eventually, so, for now, I’d like to revisit the rise in interest rates that has continued as we approach the mid-point of the second quarter. I last highlighted this in a couple of Weekly Observations back in January and February. Since then, the yield on the 10-year Treasury resumed it’s climb to the 3% level and is hovering around that point today:

1-month and 1-year Treasury rates are also up significantly — yielding 1.68% and 2.24% respectively.

With these higher rates, the income yield we are receiving on cash and short-term bond holdings has risen to approximately the following:

1.49%  —  money-market funds
1.65%  —  typical bank account we recommend for emergency cash reserves
2.20%  —  1-year CD
2.57%  —  a portfolio of short-term government bonds
3.84%  —  a managed portfolio of diversified income producing investments

Of course, on the payer end of these rates, it means modestly higher mortgage rates, increases in the rate and payments on variable loans (such as home equity), and new challenges for overleveraged companies that have relied on low rates to meet capital and cash flow needs.

There are concerns being widely discussed that higher rates, particularly over 3% on the 10-year Treasury, will have a negative impact on the economy and stock market — and these concerns may be part of the reason why the market seems “stuck” along the 200-day moving average, while participants look for clues from the Fed and inflation data as to whether rates will continue climbing or stabilize and return to lower levels.

But for now, the higher rates are a welcome development for investors with ample cash reserves, little or no debt, and the patience to identify genuine investment opportunities.

If you’re a Star Wars fan — happy May 4th. And if margaritas are more your style — enjoy your Cinco de Mayo!

All the best,
Kenneth