Market pulse: Attractive yields

David Vomund

The bull market continues with more stocks participating in the advance. Over the last three months the S&P 500 is up 3.8 percent while the S&P Mid-Cap 500 is up 6.2 percent and the S&P Small-Cap 600 is up 5.5 percent. Only a few technology stocks rose at the start of the year, but large, mid and small-cap stocks are participating now.

Then there is the bond market. Rates have eased as inflation expectations have fallen, but those with large cash balances have an opportunity to nail down attractive yields greater than the nearly 5 percent in money-market funds. That doesn’t mean yields have hit their highs. Maybe they have, maybe not. If 6.5 percent or so in an investment-grade preferred or corporate is attractive, go for it. I’ve placed client funds into preferred issues from reinsurance companies like RenaissanceRe, PartnerRe and Axis Capital. All are investment-grade.

In my March 17 article, I detailed specific securities from those reinsurance companies and I also covered an adjustable rate preferred, Annaly Capital Management, its 6.95% Series ‘F’ (NLY-F). It yields just over 10 percent and has risen above its $25 par. New buyers should consider the ‘I’ issue instead. It is $23.40 and yields 7.25 percent until it floats next year.

The bond crowd sees inflation falling, but not to the Fed’s two-percent target because of massive government spending, at a pace not seen since World War II. Core inflation by the Fed’s preferred measure (PCE) is 5.4 percent over last year, a level that is undermining personal income and wages adjusted for inflation.

Much is made of the inverted yield curve, in particular the inversion that shows the yield on the two-year note well above that on the ten-year. Why does that matter? Since WWII every recession has been preceded by an inverted yield curve. The ten-year yield (3.79 percent) is much lower than the two-year (4.76 percent). Recently the inversion has become less so. At its worst it was 1.1 percent. Now it is 97 basis points. Why the narrowing? Investors must expect the first cut to come sooner than earlier thought because a recession is near. I doubt it.

There is still too much cash (trillions) on the sidelines, pessimism remains widespread and as a group investors are underinvested in stocks. That powerful combination is a reason to expect money will continue moving to stocks and bonds. That process has only just begun.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

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