Inflation Impact on Yields
We continue conversing with investors interested in current bonds and savings account yields. Because of that, we wanted to give an update on where yields stand and also talk about real rates of return, including looking at inflation. Bonds have always been an essential part of a diversified strategy. Still, we want to point out that when looking at bond returns and, more specifically, yields, investors need to look at real rates of return that include taking current yields and subtracting the current inflation rate. The main point is that while having a better return on yield-oriented investments like bonds and other fixed income is excellent, we, as investment managers, look at the total return. Inflation is causing some current real rates on government bonds to be negative. This is why keeping exposure to stocks is important to longer-term investors. Over the past 30 years, the average real rate of return on ten-year treasury bonds is 1.4%, while the average return of the S&P 500 stock index is 9.8% in the same 30-year period. Therefore, it’s important to look at total real rates of return. Unfortunately, for treasury bond investors, higher interest rates have been unable to overcome the impact of inflation on real yields over the past several years. While yields are not the only return aspect of bonds, they are important. The real yield on the 10-year treasury bond has been negative at the end of the last four consecutive years and remains negative today. However, there were eight observations since 2008 where inflation was two percent, or lower and real yields were positive in seven of those eight year-end snapshots.
We’ve all seen the news about the regional banking crisis, and we’ve talked about how yields and the rapid rise in rates have affected the regional banks. In addition, there has been a rise in money market funds, which has taken deposits away from banks. Since the rate hike cycle started last March, bank deposits have seen about one trillion dollars of outflows. An estimated $750 billion has gone to money market funds because they yield just under 5%. The savings rates at banks are about one percent or lower. There are CD options, but money market accounts give you more liquidity and allow you to be flexible to take advantage of opportunities in the market. Of course, their rates do go up and down where a CD is locked in. However, if you see those rates going low, the flexibility to jump into the market is beneficial.
Wrapping Up Earnings Season
Around 94% of companies have reported earnings, and 77% have beaten expectations. This is an excellent sign of strength and is something we like to see. In Q3 of last year, we saw earnings top out, and we are just under what Q3 of last year was. However, while these expectations have been lowered, a 77% beat rate on earnings is encouraging and isn’t in the news right now due to the talk about the debt ceiling and rates. This topic ultimately matters to stocks and where the market goes from here.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Money Market Fund – An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Bond yields are subject to change. Certain call or special redemption features may exist, which could impact yield.
Certificates of Deposit are FDIC insured and offer a fixed rate of return if held to maturity. Brokered CDs sold prior to maturity in the secondary market may result in a loss of principal due to fluctuations in the interest rate or lack of liquidity. Brokered CDs are registered with the Depository Trust Corp. (“DTC”). Brokered CDs with step-down and/or call provisions may be less favorable than traditional CDs without these features.
Stock investing involves risk, including the potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.