Where to generate income and safety during this global asset meltdown
With the stock market melting down, investors are scrambling for safety and ways to generate income. U.S. stocks tumbled Monday as part of a global sell-off amid fears of a recession. Investors were concerned about Friday’s disappointing jobs report and whether the Federal Reserve may have waited too long to cut rates. Treasury yields have also been falling as investors fled to safety, with the 10-year dropping more than 10 basis points earlier in the session. Bond yields move inversely to prices and one basis point equals 0.01%. The move down in Treasury yields has Collin Martin, fixed income strategist at Schwab Center for Financial Research, shifting his outlook. He had been recommending that investors gradually extend duration to intermediate, high-quality bonds. While those assets can still play a role in a portfolio — and there could be opportunities if yields rebound — they aren’t attractive as they once were, he said. US5Y 1Y mountain 5-year Treasury yields Instead, investment-grade corporate bonds are a potential opportunity — and you can still get average yields around 5%, he said. In comparison, the 5-year Treasury is yielding around 3.66%. “This is really attractive, especially considering that we have seen Treasury yields plunge so much,” Martin said. Investment-grade corporates are from high-quality, strong companies — therefore, they are a way to lock in attractive yields without taking too much risk, he said. While they may underperform for a little bit, the floor won’t fall out under them, he added. “There might be some volatility here or there, especially if growth does slow, but we think the potential downside is relatively limited,” Martin noted. Certified financial planner Barry Glassman believes investors should lock in some slightly longer-term duration bonds. “If this trajectory continues, we may not see these yields again for quite some time,” he said. Glassman, founder and president of Glassman Wealth Services and member of the CNBC Financial Advisor Council , suggests turning to core diversified bond funds. The funds typically hold investment-grade government and corporate bonds, as well as securitized debt. “These managers have the flexibility to move from safer and shorter to diversified quality and global regions,” he said. For CFP Chuck Failla, the next move depends on how you have your portfolio set up. He always advises clients to have buckets within their portfolio based on their cash needs and time horizon. Money needed in 12 months or less should be in a money market, he said. The one- to two-year horizon typically has only 15% to 20% in equities and the rest in short-term bonds that are high quality and low duration, like Treasurys and some investment-grade corporate bonds. The fixed-income portfolio of the three- to five-year range will be high quality corporate bonds of intermediate duration or less, while he dips into high-yield bonds in the six to 10 year sub-category, said Failla, founder of Sovereign Financial Group. He also plans to start adding private credit in the 6-to-10-year bucket. The 10-year and up category holds about 90% equity. If you had your portfolio set up accordingly, you don’t have to do anything since stocks are a long-term investment, he said. However, if you don’t have a cash-flow plan and are overinvested in stocks, it may be time to take some money off the table, Failla advised. “If you feel you need money, after doing your cash-flow analysis, pull out at least 12 months right now,” Failla said. “When the market recovers, think about doing more.” He’s not making the suggestion based on any market prediction. Instead, it is about the amount of income you’ll need to have on hand based on your cash-flow analysis, he said.
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