We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm re...
3 Income Strategies That Don’t Work
04/20/2012 11:00 am EST
Richard Lehmann, president of Income Securities Advisor, reviews these formerly popular fixed-income strategies that no longer work in today’s environment.
My guest today is Richard Lehmann, and we’re talking about the kind of fixed-income strategies that really no longer work for the investor. So tell me about some of those.
Well, income investors traditionally like to have something that represents or provides them a minimum of actual trading activity. Therefore, buy and hold strategies have been really common. It doesn’t work well in this marketplace because of the volatility that’s there.
Also, there is a tremendous tendency that all good securities tend to get called. And there’s a lot of that going on today, especially because corporations are so flush with cash.
Another strategy that investors like is laddering. It’s a portfolio where they buy basically maturities at two years, five years, seven years, ten years.
So they always have something maturing and coming out, or whatever.
Something maturing. Laddering doesn’t work anymore in this kind of environment, because all of the short term paper up to ten years is paying from 25 basis points to maybe 2%. Which barely covers inflation.
And now even 30-year treasuries are even down to 3%. It’s a really high-risk proposition to make a commitment at that rate of interest, because we know inflation is built into the Fed policy. Maybe not over the next couple of years, but anything beyond five years or beyond is not going to work very well. So this is another strategy that you can’t work on anymore.
Well, it used to be that people who bought fixed income could just sort of just buy it and sort of put it away and not worry about it. And they could do one of those two strategies. So what you’re saying now is that they have to sort of monitor their portfolios a lot more frequently.
Yeah. Because what they have bought that was good is going to get called away, and so they’re going to have reemploy some of their money. And then they’re going to find that replacing it is not going to give them yield.
Another strategy that people engaged in was to buy municipal bonds, because that gave them a decent return and gave them no tax concerns.
That market is now where the returns really aren’t commensurate with the time risk involved here, because when you’re looking at 2% and 3% rates of return and right now probably about a 2% inflation rate—with a potential to go much, much higher than that—you don’t want to lock yourself in the munis. Because they are securities that they are easy to buy, but they are hard to sell without taking a significant haircut.
Exactly. Well, thank you for sharing those with us, because most of the time we get people who say buy buy buy this, but we don’t always get the warnings of what to stay away from. We appreciate that.
That’s because we sell newsletters.
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