When the media speaks of the yield curve, they are likely referring to the Treasury yield curve. It is the point of reference for interest rate levels and investment comparison. Although Treasuries may be a component of investment portfolios, it is often spread products that are the dominant fixed income holdings. Spread products are those securities that mostly trade at a margin or spread to the comparable Treasury security. For example, if the 10-year Treasury yields 4.59%, a corporate bond might trade at 4.59% plus a spread of 165 basis points or a yield of 6.24%. Treasury bonds are considered the highest credit quality or the least likely to default. Since spread products carry a higher risk than a Treasury bond,
For investors in the highest federal tax bracket (37%), tax-exempt municipal bonds provide the greatest benefits. Since the municipal curve is upward sloping, investors are rewarded on a grander scale further out on the curve. For investors in qualified accounts and/or those in lower federal tax brackets, corporate yields are elevated in the short and intermediate maturity ranges (1-10 years) and provide investors with attractive income opportunities within that range.
Is this a good time to shore up your portfolio’s fixed income allocation? There are two points of reference that
Second, the average annual total return of the S&P Index since the turn of the century (nearly 23 years) is 6.62%. In other words, fixed income investments can provide 5.75% to 8.00%+ tax-equivalent yields over an extended period of time which mirror or even beat growth-like returns.
Pundits will argue over future rates, but it seems most are forecasting rates moving lower than higher from current levels. No one knows for sure. What we do know for certain is that we haven’t seen these rate levels in 16 years and that the current market mirrors long-term growth-like income. Don’t miss the opportunity that is right under your nose.