Interest rates are going higher so let’s just address it now: this is unequivocally good news.
It’s good news because now you can open your monthly checking and saving account statement and see that you actually earned something.
It’s good news because investors in fixed income assets aren’t having to stretch their credit standards to get a decent yield.
It’s good news because those approaching retirement can feel better about their fixed income allocation, knowing they can reinvest maturities at attractive rates.
As rates hit their low in July 2016, a 2-year U.S. Treasury Note could be bought to earn a yield of 0.75%. It is easy to recall why fixed income investors would constantly question their involvement in the asset class. Today, a newly issued 2-year U.S. Treasury Note can be bought to earn a yield of 2.83%, almost 4x more than before.
It is the same in the municipal bond market. Two years ago, a 2-year AA General Obligation note could be bought to earn a tax free yield of 0.62%. Today, that same number is 1.96%, or more than 3x greater. If you are in the top tax bracket of 37%, that works out to a tax-effected yield of 3.10%. These are meaningful increases.
Going from the historically low rates that followed the recession to something more ‘normal’ was the monetary policy plan all along. It has taken a long time, but this is the ‘normal’ we have been expecting.
This post is not meant to be a recommendation to buy or to sell securities nor an offer to buy or sell securities.