With rates at zero %, there was nothing to be done the past 10 years. But now with somewhat investible bond yields in the market, I actually have to start thinking about researching and choosing individual bonds, and about their tax implications to each individual client.
For 15 years, the bond discussion was easy > avoid them or ride the trend of lower Fed rates as bond values increased as yields dropped. There was nothing much to think about. Many bond funds engaged in levered returns (they borrowed short term money at low rates, say 1.5%, to buy more longer term bonds yielding 3%). And no one cared because low rates were here to stay.
However with the introduction of the rising cost of living across the board since 2021, The Fed has had to pull out its tightening gun and raise interest rates to calm down a hyperactive economy and fast increasing prices.
The “Problem”
Now I have a real problem. It’s easy to shift bank money to short term government bonds - we should all be doing this for the most part. Banks are behind the curve and their CD and money market rates are way below short term US government securities in yield. WAY below. So that’s easy - plus, many might benefit from the fact that US government bond interest is free from state income tax where CD interest usually is not.
The hard part come though as I look across the bond market and seem some BBB corporate bonds yielding 8%. With a return range of 4.5%-8% for various investment grade bonds, I can now entertain the idea of some clients having a mostly bond portfolio as their plan’s REQUIRED return is now achievable with current bond rates. So I have to do some real, actual bond planning now!
Furthermore, there are the tax implications. Depending on the bond and the client, I can choose from corporate bonds that are fully taxable, to US bonds that are state tax free to municipal bonds that can be state and federal tax free.
Don’t get me wrong I am not really complaining. This is a GREAT problem to have. I am actually hoping that rates go a bit higher especially for longer term bonds. Then I can choose from all kinds of options, including inflation indexed bonds and mix in a few stocks and commodities and create much more defined portfolios for clients. And maybe like one client who started accumulating savings bonds in the 1970s and 1980s, and has earned 10%+ for 30 years on the government, I can put clients in some great bond portfolios.
We can only hope!*
By the way, If you have cash hanging around doing nothing and we haven’t discussed this yet, call me.
*Of course this means inflation is likely staying high and stocks are in trouble.