Popping
Bubbles
Yields on both the 1-month and 3-month Treasury bills dipped below zero Wednesday, a week and a half after the Federal Reserve cuts its benchmark rate to near zero and as investors have flocked to the safety of fixed income amid general market turmoil.
It was the first time that happened in 4½ years, when both bills briefly flashed red and yields fell to minus-0.002% each. The readings Wednesday were well below those. The one-month traded at minus-0.053% while the three-month was at minus-0.033% around 2:35 p.m. ET.
DYI: Unfortunately the popping of the junk bond bubble another run to
quality [relatively speaking] and safety to short term treasury bills dropping to
slightly negative yields. A typical
static 60% stocks, 30% bonds, and 10% bills [cash] portfolio has been hit hard
with a peak to current trough 27% decline for equities. This typical asset allocation would have
intermediate term bonds with a mixture of high grade corporate and Treasury
notes that has experienced a nice bump up in price however this will decline
future compounding [lowering current yield]. Vanguard’s Intermediate-Term Bond Index Fund Admiral Shares (VBILX) is now
a scant 1.77% yield. T-bills are now
negative yield much to the chagrin for our typical 60 – 40 – 10 investor.
So…
I’ll do the math just sit back and let’s see would our estimated average
annual return will be if we put our money into our 60 – 40 – 10 portfolio today
going to sleep like Rip Van Winkle waking 10 years from now.
Stocks…3.13% x .60 = 1.878% rounding 1.9%
Bonds…1.77% x.30 = 0.531% rounding 0.5%
Cash…0% x .10 = 0% rounding 0%
Adding them all up [1.9 + 0.5 + o] = 2.4%
2.4% average annual return for the next ten years. For a retirement account with that return you
will need to buy the recipe book 15 ways to eat Alpo dog food and enjoy
it! Ouch!
Valuations for both stocks and bonds remain absurdly priced. Our long term investor will have to continue
to wait for improved valuations.
Till Next Time
DYI
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