I realized this a few days ago when I checked a publication I use quite regularly. Titled with the dramatic sense common to all Federal Reserve documents, it's called "Selected Interest Rates." Published by the Federal Reserve Bank of Dallas, it is updated monthly. The current issue includes August data and goes back to January 1970.*
But that's not far enough.
Recently, the yield on 6-month Treasury bills was only 1.59 percent. At 1.91 percent the yield on 2-year Treasury notes wasn't much better. Yields on 5-year and 10-year Treasuries were 2.74 and 3.68 percent, respectively.
To find when on the 5 or 10-year Treasury was lower we have to go back 44 years--- to the spring of 1958.
That's an entire year before the introduction of the Barbie doll. We are talking about cultural pre-history.
Using the Ibbotson Associates database, I found that intermediate term government securities yields were higher than the current yield on 5-year Treasuries in 1929, 1930, 1931, 1932, 1933, and 1934. Only when we were in the seventh year of the Great Depression did yields fall below 2.9 percent.
So how do we invest today?
Very carefully: interest rates are more likely to rise than to fall. If they rise, investors will lose money because the value of fixed income obligations will fall. This means people who are disgusted with their losses in equity mutual funds could soon be disgusted with their losses in fixed income mutual funds.
Bottom line: There is no better time for individual investors to build a ladder of fixed income securities.
If you haven't heard of laddering, don't be intimidated. Building a ladder is quite simple. You buy securities at different, evenly spaced, maturities with the intention of holding them to maturity. You can do this by shopping for bank CDs, CD-like fixed annuities, or Treasury obligations.
Suppose, for instance, you invested in a series of fixed income obligations that matured in 1, 2, and 3 years. That would be a three-year ladder. At the end of the first year, the 1-year obligation would mature. You would replace it with a new 3-year obligation. You would have a portfolio with an average maturity of less than 2 years.
The yield, however, would be the average of 3-year securities over the preceding three years. So you have more yield, less risk.
The only action you would have to take is to invest in a new 3-year security once a year. Better still, you could be cosmically indifferent to anything Alan Greenspan says or does. You'd have Interest Rate Anxiety Immunity!
Because one-third of the portfolio matures each year, there is a good chance you will never find yourself in a loss position. If you need money, you can wait for a maturity instead of selling a security at a loss. If a maturing security doesn't provide enough money to meet an emergency, you can sell the next security closest to maturity, minimizing your loss.
Using the same method, you can easily build ladders out to 10 years or more. The longer the ladder, the higher and more stable your interest income will be.
Why is this a good idea?
Simple. Building a ladder reduces or eliminates possible losses due to rising interest rates. This is not a minor issue. Long-term bonds have lost value in 38 of them of the 76 years since 1926. That's half the time. Intermediate term bonds have lost value in 35 years. That's 46 percent of the time.
With yields on government securities are at the lowest level in 44 years, those aren't good odds.
(Selected Interest Rates can be downloaded as a 40-page PDF file from)
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