Target Sighted

The Fed stated that it plans on keeping the Fed Funds rate between 0.00% and 0.25% until at least mid-2013. Although it is not surprising that the Fed would remain extraordinarily accommodative for that long, it is surprising that the Fed would set a target. The Fed has not traditionally set targets. However, Fed Chairman Bernanke has in his academic past spoken positively about targeting.

By setting this target time frame, the Fed takes the mystery out of policy for the next two years. This makes it easier for lenders, borrowers, and businesses to make strategic decisions. It also provides clarity for investors. The Fed is sending a message. That message is: Get out of cash and floating-rate securities based on short-term benchmarks and into high-dividend paying stocks, high grade bonds seven to ten years out (especially banks, finance companies and insurance) and BB-rated high yield bonds 5 years and in.

Preferreds had cheapened up recently, but they rebounded late in today’s trading session. There maybe some value left it that asset class. Step-up notes offer some value here as many have attractive yields-to-call if rates do remain low and they are called away, but provide cushion should rates rise.

Play defense, but vigilance is a very good defense.

P.S. Indirect bidders (which include foreign central banks) purchased almost 47% of today’s 3-year treasury note auction versus a 36% average for the past 10 auctions. So much for the exodus from the AA+ U.S. treasury.