Patience. That's my advice to income investors. I know that a yield of 4.5% on the 10-year Treasury note or 6% on a real estate investment trust, or REIT, looks pretty tempting. After all, the returns on both investments are a full percentage point higher now than they were just a month ago. And I know that every Tom, Dick and guru on Wall Street is yelling "buy on the dip" in the price of fixed-income instruments. But historic market bubbles don't work themselves out in a month. The evidence from 1994-95 -- the last time the Federal Reserve began raising interest rates in a major way -- and from the stock market bubble of 2000, argues that fixed-income markets have just started unwinding the excesses built up in the market since the Fed lowered the fed funds rate to 1% on June 25, 2003. So hold onto your cash. Wait and wait some more. And then, finally, pull the trigger when you can get the kind of peak yields that are available when everything looks darkest for fixed-income assets. That could come as early as the end of 2004 or sometime in 2005. Later in this column, I'll offer my five-step plan to help the patient fixed-income investor prepare for the ongoing climb in interest rates. But first, some background.
Like Giving Money Away
Why do I call this a fixed-asset bubble? Let's look at some of the numbers. The last time the Fed began unwinding what were then regarded as ultra-low interest rates was in February 1994. The federal funds rate was 3% when the central bank reversed course and started raising short-term rates after keeping them at the 3% level for 17 months. To even approach the current low of 1%, you must return to the 1950s: The effective federal funds rate hit 1% in both 1954 and 1958. For the last 10 months, the economy and the financial markets have been living with the lowest rates in almost 50 years.