To me, a “safe real return” has these components:
- Regular payments to me, either interest or dividends.
- The payments can’t be reduced (e.g. a dividend cut).
- The payment is higher than the inflation rate.
- The underlying security price (bond or stock) can’t (or probably won’t) fall more than the payment to me.
The Fed’s Preferred Inflation Gauge Sped Back Up
Inflation is down from its peak last summer, but recent readings have shown substantial and surprising staying power.
By Jeanna Smialek and Ben Casselman, The New York Times, Feb. 24, 2023
After six months of more or less consistently cooling down, the Personal Consumption Expenditures price measure climbed 5.4 percent in January from a year earlier, an unexpected pickup from 5.3 percent the prior month and substantially more than the 5 percent economists had expected.
Even after stripping out food and fuel prices, both of which jump around a lot, the price index climbed by 4.7 percent in the year through last month — also a pickup, and more than expected in a Bloomberg survey of economists.
Those inflation readings are well above the Fed’s goal of 2 percent annual price increases. … [end quote]
As the bond market gradually is absorbing the consistent message from the Federal Reserve, bond yields are gradually rising.
Welcome to the 5% World, Where Yield Chases You
The dark cloud of rising interest rates comes with some significant silver linings
By Jason Zweig, The Wall Street Journal, Feb. 24, 2023
This week you could earn 5.1% on a six-month U.S. Treasury bill, free of state and local tax. High-quality municipal bonds are yielding the equivalent of roughly 5.5% if you’re in the top federal tax bracket. You could also buy TIPS (Treasury inflation-protected securities), maturing in 2043, that assure you of a return more than 1.6 percentage points above inflation if you hold for the next 20 years.
The Fed seems poised to raise rates several more times to try stifling inflation, so you’d be naive to think no further losses on bonds are possible. Instead, take what the market gives you—and welcome the high yields on the highest-quality bonds as a reminder that you should tune out any pitches for “alternative income.”…
A 5% yield on short-term Treasurys is like kryptonite for the purveyors of high-yield debt, energy partnerships, emerging-market bonds, private credit funds, private real-estate trusts, business-development companies, floating-rate bank-loan funds—all sold on the premise that you needed to take extra risk (and pay extra fees) to get extra income…
A handy “risk reduction calculator” at DepositAccounts.com enables you to see how much you should put in safe and risky assets, at a specified rate and period of time, to break even or come out ahead…[end quote]
The Fed will certainly raise the fed funds rate at least twice more in 2023 and hold it for the rest of the year. The markets are now expecting a fed funds rate of 5% to 5.25% but it could go higher if inflation doesn’t come down.
Treasury money market funds yield 4.3%. I just bought secondary market TIPS maturing in 2025 yielding 2% above inflation. Like the Treasury yield curve, the TIPS yield curve is inverted – longer duration TIPS yield less than shorter. Newly-issued I-Bonds yield 0.4% above inflation. The advantage of I-Bonds over TIPS is that the I-Bond always returns par when redeemed, while TIPS can return less than par if sold when interest rates rise.
Dividend-yielding stocks have a tax advantage if held for over a year but I think there’s a lot of downside risk in the stock market.
Wendy