By  Scott Moser, CPA/PFS, MST

In 2009, this newsletter highlighted the U.S. Central Banks effort to depress U.S. interest rates.  We argued that the Federal Reserve was effectively subsidizing investor’s purchases of risk assets such as high-yield bonds.  By paying virtually no return on 3 month Treasury Bills, investors should shift to risk assets that provide greater returns.  So we recommended shifting to risk assets!

The chart below reports the trend in high-yield bond rates. The value of bonds moves inversely to the yield, so the recent drop in bond rates has resulted in the current lofty valuations for junk bonds.

 

Last November, Ben Bernanke openly acknowledged that this was his strategy to get investors to shift from Treasuries to risk assets such as stocks & low quality bonds!  So now that everyone knows the FEDS game plan,  is it too late to get in on the action? 

Bill Gross, the respected manager of the largest bond fund in the world recently added his critique of the FEDS actions: “To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another.”  Mr. Gross pointed out that the smaller savers were the investors being punished in the process.  However, he suggested bond holders still have several tools to protect themselves.  Investors can seek out longer-term maturities or emerging market debt.  Countries with strong economies and currencies may provide the key to more favorable real returns from investments in bonds.  We concur, as well as point out that high-dividend yielding stocks and preferred stocks can also provide stable and attractive risk adjusted returns.