October 1, 2026
As most of you have read or heard, the Federal Reserve (Fed) has raised the short term interest rate for the first time in three years to 3.75%‒4% and it looks to raise it further. The Fed has cited inflationary pressures from the energy sector, and like us, it is concerned that these price increases get embedded into other parts of the economy, which will make the Fed’s job harder in its quest to get inflation back to its 2% goal. (CPI currently at 3.4%).
One of the consequences of the Fed's action has been higher interest rates in fixed income markets, starting with the US Treasury market. Two-year treasuries are at a 4.90% yield, up from 4.15% one month ago. Five-year rates are over 5% in yield, having risen from 4.35%, and the 10-year rate (which may be considered the most important rate due to its effect on credit cards and mortgages rates) has risen from 4.63% to 5.25%, the highest since 2004.
What is driving interest rates higher are the prospects of continued large deficits, a tremendous amount of treasury and corporate bond supply and the prospect of future inflationary pressures. We have heard virtually no discussion from the administration on reducing the deficit, debt, or spending. Now the U.S. is in competition with other fixed income sectors and foreign markets to sell its debt, therefore yields have to be attractive.
We think we are at yield levels where there is value. The S&P 500 has a dividend yield of 1.07% while six-month T-bills yield 4.25% and two year notes are 4.90% with lower volatility and risk than equities. We are not suggesting yields will fall dramatically and produce a nice total return. From an income point of view, now is a great time to add fixed income. With higher coupons available, we now have a nice “yield cushion” if yields should continue to move higher. For example: you can buy a treasury with a 5% coupon maturing on 9/30/2031 at a price of 99.625 to yield 5.05%. In this current environment, you would need the yield to rise to 6.25% in a one-year time period before you go below your original market value on this position. Plus, in one year the bond you bought would have four years until it is due, and since it was purchased below par (100), the price gets “pulled” to par each year. Par is its price at maturity.
If one has a concern about reducing risk from the phenomenal performance of the equity markets, now is a great time to add fixed income to portfolios with either U.S. treasuries or municipal bonds via municipal ETFs or mutual funds. Please don’t hesitate to email or call us to continue this discussion or answer any questions you may have.