by Vernon A. Reid, Jr.
In your wealth accumulation, retirement planning and cocktail conversations, discussions tend to focus on stocks. As one ages, investment stability matters. Thus, bonds begin to matter more in investment considerations. For absolute size, the US, bond markets (US, State & Local Governments, corporate, mortgage-backed, and securitized) are close to $40 trillion in value, versus less than $20 trillion for domestic stocks.
“Stocks are inherently speculative. They provide fractional ownership of a company …a company isn’t required to pay them. Bonds, on the other hand, are a loan to a company or a government, like the United States, which is generally obligated to pay you interest, and at a certain date, repay your principal, too.” NYT, Jeff Sommer, 8/13/23
“”The Great Gatsby’s” narrator Nick Carraway was a bond salesman and Sherman McCoy in Tom Wolfe’s “The Bonfire of the Vanities” traded them. Bonds have never figured in the popular imagination in the same way as stocks, say, or corporate mergers and acquisitions(M&A).” Financial Times, Robin Wigglesworth 5/6 August 23
March 2022, when the benchmark federal funds target was effectively 0%, the Federal Reserve embarked on a program to lower inflation. The Federal Reserve raised rates 11 times, resulting in a federal funds rate between 5.25% and 5.50%, a 22 year high. Subsequently, the Consumer Price Index (CPI) has been lowered from 9.!% in June of 2022 to 3.2% in July of 2023.
On an individual level, much of our financial decision-making should begin with “cash”. Cash is deployed to our daily, weekly, and monthly transactions, for emergency expenditures and savings, and to retirement plans.
The yield curve for fixed income investments are almost always upward-sloping, with higher yields for longer dated instruments. But, because of Fed tightening and recessionary concerns, today’s Treasury yield curve is negative or inverted. The Central Bank Rate is 5.50%, 3 Month Treasury Bill 5.34%, Two Year Treasury Note 4.98%, Five Year Treasury Note 4.44%, Ten Year Treasury Note 4.20% (Mortgages and other long term rates track the Ten Year UST) and the Thirty Year Treasury Bond 4.30% (There may be a slight pickup of 10bps from 10-30, but the historical average is 50bps or 0.50%) All other interest rate vehicles and securities are priced as a function of US treasury rates.
The diametrically opposed needs of many of us are where to invest in this higher rate environment and how to lessen one’s potential mortgage and credit card debt. “Mortgage borrowers are already facing a steep new rate cliff. On Monday, the average on a 30-year fixed-rate mortgage rose to 7.48%, the highest level since November 2000.” WSJ, Editorial 8/23/23. “In 1981, mortgage rates peaked at a jaw-dropping 18.53%. Still, the average home price in the second quarter of 1981 was $84,300- even adjusted for inflation, that’s about $287,020, which is far less than the average price of $495,100 in the second quarter of 2023.” NYT, Ronda Kaysen, 8/6/23. According to Forbes Advisor’s weekly credit card report, August 28, 2023, the average credit card interest rate is 27.99%
“With yields above 5 percent, money market funds have a powerful allure…. The only real change in my financial life in recent years is that I moved much of my emergency money from my bank accounts to money market funds because of superior yields.” NYT, Jeff Sommer, 6/25/23
Cash in retail money-market funds has grown more than 25% this year to $1.5 trillion, according to Federal Reserve data.
The average yield on the 100 largest taxable money market funds reached 5.15%, its highest since 1999, Crane Data.
Money market securities are generally high-quality, short-term obligations issued by government entities or companies.
“I’d say, make sure you can pay your bills first. Don’t put any money into the stock market that you can’t stand to lose. And invest for the long haul. Think, study, innovate and do all you possibly can to keep the world afloat. But for your own personal investing, keep it simple.” NYT, Jeff Sommer, 6/11/23
“As soon as you can, contribute enough to get the full company match. Avoid taking 401(k) loans. If you’re unsure of your ability to manage your retirement holdings, consider a target-date fund. Most target-date funds hold a mix of stocks, bonds and other investments.” Washington Post, Michelle Singletary, 8/20/23
“We might choose to give priority to earning money during certain periods of our lives while giving greater weight at other times to creativity, public service or caring for loved ones.” Harvard Business Review, Shawn Achor, 2018
AARP Retirement Calculator- www.aarp/work/retirement T Rowe Price Retirement Calculator & Financial Retirement Planner- www.troweprice.com/tools
This week I harkened back to my youth when people paid with cash, checks(1762), money orders(1864) or Western Union transfers(1871). In time, we’ve added credit cards(1958), debit cards(1966), pre-paid cards, online bank transfers, mobile payment apps, digital wallets, contactless payments and buy-now-pay-later capabilities. For each and all of these methods, try to balance the speed and flexibility with the security and overall costs of transactions.
“This year marks the 50th anniversary of legalized gambling in Maryland. Spending on traditional lottery games has grown to $2.5 billion annually and casino wagering to $2 billion each year. Overall, it is the fourth-largest tax revenue source for the state budget after income, property and sales taxes. But, one statewide study suggests 8.6% of all adults have experienced disordered gambling in their lifetime.” Baltimore Sun, Editorial Board, 8/15/23
Proverbs 22: 7-8 “The rich ruleth over the poor. And the borrower is servant to the lender. He who sows iniquity will reap sorrow…”
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