Today I received many calls from brokers looking to position clients for soon-to-materialize higher interest rates. This sudden reignition of higher interest rate fears caught me off guard. After all, treasury auctions have been strong (today's seven-year was a bit weaker than expected, but still good), economic data has been pointing toward a modest recovery and job growth has been disappointing. I was perplexed by such sudden fears until one branch manager revealed their source, fund wholesalers. Apparently some fund wholesalers have been pushing floating rate funds for the eventual popping of the" interest rate bubble."
I don't think the U.S. will become another Japan, nor do I think long-term rates can remain at current rates forever, but the early 1980s are not about to make a comeback. The Fed is not ready to move to a tightening bias at this time. We could be a year away from the first Fed tightening. Since the Fed usually moves 25 basis points at a time, pausing along the way, it could take years before Fed Funds hit 3.00% (at this point 5.00% looks unlikely in the foreseeable future). That would mean that USD LIBOR, which tracks Fed Funds, will remain low as well. Buy floaters at your own risk. Stop trying to hit home runs. Ladder and diversify accounts. Adjustable rate bonds are designed to benefit issuers more than investors. Invest to benefit you and your clients. Also, DO NOT BUY T-BILLS unless you absolutely have to. Rolling up with the Fed could result in sub 2.00% average returns over the next 4 to 5 years.
I would rather put my money in 10-year bank and finance corporate bonds. Credit products over interest rate products whenever possible.
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