One of the challenges many investors encounter along their investing journey, is to determine what financial commentary is worth paying attention to and what is worth ignoring. Over the years, I’ve noticed plenty of less than factual information written in financial commentaries, especially concerning bonds. In general, the financial industry seems geared toward promoting equity investments and instilling fear in those considering something else—like fixed income.
Every once in a while, I think it’s worth pointing out and discussing some of the less than factual information I come across. In a recent article concerning the topic of inflation, linked here, the author included a section entitled, “Fixed income: Not an alternative in an inflation driven economy.” Within that section of the article, he stated the following [emphasis added]:
“If the retiree was desirous of committing his money for a long period of time by tying up his funds in a long term bond, not only would the current long-term 2.6% treasury yield come to less than zero after tax and inflation, but the interest payment would remain the same for 30 years.
To see a list of high yielding CDs go here.
The same would apply to any fixed income investment, like a bank CD or corporate bond. The $2.60 per $100 invested on a treasury that you’d receive each year for 30 years . . .”
There are a couple of issues with the author’s statements.
First, he was referring to the 30-year Treasury bond, which, at the time his article was published, was yielding right around 3.30%–not 2.60% as the author stated. Additionally, because the author chose to bring taxes into the equation, it’s important to mention something left out of the article. Treasury securities are not subject to state and local income taxes. Therefore, when analyzing whether Treasuries will provide real returns, it is important to calculate your particular taxable-equivalent yield on the Treasury security you are considering. The calculation is similar to that municipal bond investors use. For example, on a Treasury bond yielding 3.30%, an investor subject to 10% in state and local income taxes would have a taxable equivalent yield of 3.67% (3.30% divided by 0.90). Although I don’t find a 3.67% yield on a 30-year bond attractive, it is significantly higher than the 2.60%, 30-year yield quoted in the aforementioned article.
Second, the author stated that “the same would apply to any fixed income investment.” The truth is that there are scores of fixed income investments providing real returns, especially in the 30-year maturity range the author was discussing. Below is a snapshot of the highest yields available in Fidelity’s inventory at the time this article was written. I’d especially like to direct readers’ attention to the 30-year column, since that was the aforementioned author’s focus. Also, keep in mind that this snapshot doesn’t even include preferred stocks, exchange-traded bonds, or non-investment-grade bonds, which are also examples of fixed-income alternatives.
It’s quite likely that every investor won’t find every bond in Fidelity’s 30-year inventory attractive. While every investor may not find each of the bonds appropriate for their yield requirements, risk tolerances, and time horizons, it is important for financial commentators to provide accurate information, so that investors can make the best decisions possible for their circumstances.
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