For What It’s Worth

I recently put most of my meager savings into bond ETFs, not because I expect the bond market to soar, rather because it is the only place that offers a bit of stability and steady returns in these troubled times.  Here is why that segment of the markets is a good place to park my money, and it’s probably a good place for yours also.

Credit markets, bond yields, mortgages, and interest rates are all tied together around the world. When these rates are too high, too low, or too volatile, economic life and economies suffer. The world is in a period of low inflation, and that also means low interest rates. US banks are currently paying 0.15 percent on savings accounts, and 0.05 percent on checking accounts. If you were to put $100 into a bank savings account, in one year you would have $100.15. How pathetic is that? That rate does not attract a lot of money.

On the other hand, mortgage rates for a 30-year mortgage are now under 3 percent. That is the lowest since  WWII. I jumped all over that phenom and refinanced to a 2.75 percent mortgage rate. Fortunately, I was able to do it with my credit and other finances in good shape. If you are close to my age, you remember mortgage rates of 7, 8, 10, even 15 percent per year! Imagine what your monthly payment would be at those rates! 

Our central bank is the Federal Reserve system. They set monetary policy, meaning they keep our interest rates competitive with the world, while monitoring our economic growth and employment. In the past few years, they have lowered rates again and again to meet their charter of a growing economy with full employment.   Now the Covid-19 virus has intruded into their affairs also. In their collective wisdom that have chosen to not follow other countries’ paths to negative interest rates. Indeed, they have unanimously rejected negative rates. Hurrah for the Fed! I agree that is a path to nowhere.

Instead, they have opted to do something they’ve never done before. And that is to enter the corporate bond market and give it a lift.  They have decided to go beyond setting rates on Treasury bills, notes, and bonds—and try to stabilize the corporate bond market indirectly via ETFs. The investment grade corporate bond market contains about $9 trillion of value. They have about $4 trillion of purchasing power.  In the immortal words of the late Sen. Everett Dirksen, “a trillion here, and a trillion there, and pretty soon we’re talking real money!” 

The Fed has committed itself to buy ETFs of corporate bonds of all maturities during the coming months and even years to help put some vitality and stability into credit markets—from very short-term borrowing to long-term such as for building new factories and new office space over the next 30 to 50 years. Bond prices and yields go in opposite directions, and so they will be walking a line toward bringing about a balance between lenders and borrowers for the next couple of years. I see that objective (and the Fed’s massive purchasing power) as a very smart move. That’s why I am an ETF purchaser of bonds in this time of great stock price volatility. Two bits of wisdom still prevail in the investment markets: “The trend is your friend,” and “Don’t fight the Fed.”