Where do you invest your money, today, for safety and income?

That is the question of the moment.

So far this year no investment has been safe. Recently, seventeen of the twenty domestic stock fund categories tracked by Morningstar showed losses for the year. Five of the fourteen international stock fund categories showed losses for the period. And seven of the twelve bond fund categories showed losses.

Places that are usually considered "safe," aren't. The average short-term government bond fund has lost money so far this year.

We can always explain it by pointing to fear and uncertainty. But the more likely cause is less emotional. If you track interest rates closely, it's now clear that interest rates are rising--- all interest rates. According to the constant maturity Treasury index series maintained by the Federal Reserve 3 and 6 month Treasury bill yields bottomed in late December of 2003 and in January of 2004, respectively. The one-year Treasury index bottomed in June of 2003. The two-year, three year, and five-year indices bottomed in March of 2004.

Finally, the 20-year Treasury index bottomed at 4.49 percent this February. Where long-term interest rates once declined while short-term rates rose, now all rates are rising.

The long bull market in bonds--- the bull market that lasted from 1981 until early this year---is over. Unless you believe a major recession is coming this is not a good time to make long term fixed income commitments.

Last Yield Rising
This table shows the lowest yield in the constant maturity treasury series and the date it occurred. As short-term yields were rising in 2004, long-term yields continued to decline until early in 2005. Now all yields are rising.
Maturity Lowest yield Date of Lowest Yield Recent yield
3 months 0.89 percent 12/26/03 2.76 percent
6 months 0.97 01/16/04 3.15
1 year 0.95 06/20/03 3.68
2 years 1.53 03/13/04 3.86
3 years 1.93 03/26/04 4.03
5 years 2.70 03/19/04 4.11
20 years 4.49 02/11/05 4.77
Source: http://www.federalreserve.gov/releases/h15/data.htm

Uncertainty over future interest rates was increased with the recent public disclosure about the March meeting of the Federal Reserve Board of Governors. Meeting minutes noted that possible inflationary pressure might make it necessary to increase interest rates faster, and in larger increments, than the quarter of a percent increase of last year.

What's the best place for our money in such circumstances?

Yield ladders.

Currently, Treasury obligations yield more than the average Certificate of Deposit for the same maturity. You can check this for yourself in a regular comparison on my website, http://www.scottburns.com. Called The DOG Report. (DOG stands for Deposit Opportunity Gap) It calculates how much more, or less, interest you'll receive on a $50,000 portfolio of Treasury obligations compared to similar portfolio of CDs. Last week, your CD income would be $365 a year less.

Here are two low-risk Treasury yield ladders.

One-Year Treasury Ladder. You build this with four $10,000 (or more) Treasury obligations maturing in 3, 6, 9, and 12 months. When each obligation matures it is replaced with a new 1-year obligation. At recent yields, this ladder would return 3.23 percent a year, a significant improvement on both bank and mutual fund money market accounts. With a difference of nearly 100 basis points (1 percentage point) between a 3 month maturity and a 1 year maturity, your exposure to interest rate risk is minimal--- short term yields can rise by that much before your security would have to be sold at a loss. Your yield will rise with interest rates and you'll have the yield of a 1-year security on a portfolio with a maturity of 6 months. (Note: your actual yield will be about 20-25 basis points lower unless you invest very large amounts of money.)

Three-Year Treasury Ladder.   You build this with three $10,000 (or more) Treasury obligations maturing in 12 months, 2 years, and 3 years. When each obligation matures it is replaced with a 3-year obligation. At recent yields this ladder would return 3.86 percent. That's 94 percent of the 4.11 percent yield on a 5 year Treasury so you'll be getting most of the yield without the interest rate risk of a longer-term security.

Either of these ladders will give you a higher yield than the average short-term government fund--- and a shorter average maturity. In other words, you'll have more yield with less risk.


The weekly Treasury/CD comparison

Selected Interest Rates, Historical Time Series