Slacker

I am of the opinion that the peak Fed Funds rate during the coming cycle will be somewhere around 4.00%. My thinking is that with consumers forced to live closer to their means, growth and inflation will lag recent past cycles. To make sure I wasn't being too pessimistic, I asked a very respected fixed income strategist (one who has been somewhat more optimistic than I) his opinion regarding where he thinks Fed Funds will peak before the Fed begins to ease again. Imagine my surprise when he tells me that he believes Fed Funds will peak around 3.00% during the coming cycle. This is bad news for investors determined to stay in cash or who think they can eliminate interest rate risk by purchasing LIBOR-floater longer-term bonds and preferreds.

Please understand that the Fed SHOULD remain extraordinarily accommodative for an extended period of time. I am a cruel sot. I believe in responsible borrowing and investing. Corporations and individuals should be permitted to suffer the consequences of their actions. Keeping rates too low for too long could create new bubbles. Fed policy is certainly at least partially responsible for higher gold and oil prices.

So what is a fixed income investor to do? Diversify. Ladder, barbell and use different products, CDs on the short end, agencies on the belly of the curve and bank and finance bonds seven to ten years out. Also, please understand what makes a bond tick. Features such as calls, floats and steps are structured to benefit the issuer, not the investor.