As we move into the 4th Quarter, persistent concerns about US Economic growth have led to a fight-to-quality trade in the US Treasury market. Whether it’s fear about the ongoing US/China Trade dispute, Brexit, slowing growth in European and Far east countries or the relative value of the US Treasury market relative to the negative rates in many foreign countries, investors continue to reallocate assets into US Treasuries. One of the challenges that face investors in this fixed income market is the lack of yield, or earnings available as you move out the maturity curve. Indeed, as of this writing, the 1 month US Treasury Bill has the same yield as the 10yr Treasury Bond: 1.76%.
This dynamic has both positive and negative ramifications for the US Investors. On the positive side, the US Housing market should benefit from a continued low rate environment. Furthermore, for individuals and companies with solid balance sheets, the cost of capital remains low. The US Government is considering offering longer maturity bonds in this low-rate environment to capture the ability to borrow money for longer periods at rates that are very low by historical standards for the fixed income market. Overall, concerns about the global growth and how it is impacted by controversial trade disputes could extend this dynamic into 2020.
On the negative side, outdated thinking investors who look to the relative safety of CDs and bonds as an income source in retirement might have to consider riskier assets if their investments are to keep up with inflation. Many of these same investors have built up sizable cash positions in retirement. They would be susceptible to the issue of sequence of returns, a risk of timing the withdrawals that could have a lower rate of return than anticipated, as they start their retirement. Declining rates in the fixed income markets do not help those investors with large allocations to those bonds, though they can be offset by the growth in price, as yields move inversely with price.
As we look to the future, the dynamic interplay between fixed income markets and equity markets will be something that all investors will be watching. At Etiquette Financial Partners, we standby ready to help our clients navigate these challenging markets.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is meant to be general, is not intended to be used as a primary basis for investment decisions. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated. Fixed income securities are subject to increased loss of principal during periods of rising interest rates, and are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investing involves risk and the potential to lose principal. Consult a professional before making financial decisions.