Dull? Yes. But while 11 of the 17 Lipper equity fund indexes are showing losses so far this year, nine of the 11 Lipper fixed-income fund indexes show gains.
But no one cares. Mutual fund investors are yanking money out of fixed-income funds and putting all their bets on the equity markets. At the end of October, figures from the Investment Company Institute show that fixed-income funds were in net redemption. Nearly $80 billion had been removed from hybrid (mixtures of stocks and bonds), muni and taxable bond funds.
Meanwhile, $291.3 billion in net new cash poured into equity funds. Indeed, even in the devastation of November, new cash continued to pour into equity funds.
That isn't the end of odd events:
Treasury and bank CD yields cross paths. I've tracked the relationship between bank certificates of deposit and comparable Treasury obligations for years. Week after week, with few exceptions, Treasury yields were higher than yields on the comparable CD. Often, the gap was at least 1 percentage point. Gaps like that can mean a lot if most of your spending money comes from interest earnings. On a $50,000 portfolio, for instance, it could mean an extra $500 a year.
You can track this difference on my Web site in a feature called "The Bankers DOG," where DOG stands for deposit opportunity gap. Each week I pull average CD figures from www.Banxquote.com. Then I put them into a table with same maturity Treasury yields and calculate the DOG. The same page also calculates the annual income difference on a $50,000 portfolio and provides links to additional information sources. (click here)
In late July, something strange started to happen. While CD rates rose with increasing maturity, as usual, Treasury yields started falling with maturity. By late September, longer Treasury yields had fallen so far that a five-year CD was yielding slightly more than a five-year Treasury. By early December, the yield on a two-year CD was higher than the yield on a two-year Treasury.
It looks like the Asian crisis. In the summer of 1998, as Asia hit the skids, the combination of Federal Reserve money expansion and a flight to quality put Treasury yields in a nosedive. For the first time since I started calculating the DOG, bank CDs were offering a yield advantage to Treasuries. (You can see a long-term chart going back to 1996 on my Web site.)
Now Treasury yields are plummeting as investors rush to quality once again. The five-year Treasury that was yielding more than 6.3 percent at midyear is yielding only 5.3 percent today. The Bankers DOG has hit its lowest amount since the Asian crisis.
What does it all mean?
If you believe that the markets are a crystal ball for the economy, it means we're heading for a very soft economy.
But we can't do anything about that.
What we can do is pay attention to relative opportunities:
Shop for CDs. If you've been a Treasury investor and have some issues maturing, this is a good time to do some intense shopping for bank CDs. While the national average yield on two-year bank CDs was 5.52 percent, just slightly higher than the 5.48 percent on a two-year Treasury, the highest yield offered on a two-year CD was 6.79 percent, according to Banxquote.com.
Consider inflation-protected securities. With conventional Treasury yields plunging, TIPS (Treasury Inflation Protected Securities) and I-Savings Bonds look increasingly attractive. While the five-year conventional coupon Treasury yields 5.48 percent, the five-year TIP is yielding 3.57 percent over the inflation rate. So any inflation rate over 1.91 percent a year for the next five years will put the TIP ahead. Ditto I-Savings bonds that currently yield 3.40 percent plus inflation, tax-deferred.
Prepare to refinance. It's not a sure thing -- and it may not last long -- but we could see a downtick in home mortgage interest rates. So if you could benefit from a refinance, start getting your paperwork together.
Tuesday: hunting for tax-free income.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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