Markets Give Savers Many Opportunities

Thanks to recent divergent trends in the financial markets, income-conscious savers and investors have some interesting opportunities to consider at midyear.

Interest rates have risen in the bond market since the start of the year, pushing bond prices lower, while the stock market has kept climbing to record highs. Longterm Treasury bonds that offered yields of around 6 percent last winter have lately sported interest returns in the 7 percent to 7.1 percent range.

So while many analysts grow more and more nervous about the possibility of a setback for stocks, hardly anybody is very worried about excessive enthusiasm in the bond market.

At the same time, rates have held relatively steady in the shortterm money markets, leaving yields on many money market mutual funds in the range of 4.8 percent to 5 percent.

All this adds up to a reasonable, if not exactly tantalizing, menu of choices for people who want or need to get current income from their investments - especially when you consider that reported inflation has been limited to annual rates of between 2.5 percent and 3 percent of late.

“The bond market’s weakness reflects fears of future inflation more than any current developments,” says Norman Fosback, editor of the advisory letter Income Fund Outlook in Deerfield Beach, Fla.

If you think those fears are overblown, you can invest in medium- to longer-term interestbearing securities in the hopes of getting a pretty generous yield that will stand up well against inflation.

On the other hand, if you think inflation worries are justified, you can channel your money to shortterm investments such as money funds, figuring that yields in the money market will rise as inflation heats up.

Money rates also would stand to climb if the Federal Reserve, moving to head off inflation, tightens credit conditions in the next few months, as some analysts think it might.

Perhaps bond yields would also increase further, pushing bond prices lower still, on a Fed tightening. But maybe not, if bond traders saw the central bank’s action as a timely step to keep inflation in check.

And what if you haven’t a clue what inflation will do? You can split your money between the long- and short-term markets, and consider yourself hedged against that uncertainty, while still getting fairly well paid.

Another reason to consider diversifying maturities: The bond market remains a volatile place.

“Bond prices are due for an interim rally,” Fosback ventures. “But near-term prospects aside, we believe risk-averse income investors should continue to avoid long-maturity holdings.”

At the same time, however, bond interest rates today look pretty generous when you compare them to the yields available on the main competition, stocks.

Even six-month Treasury bills, a very short-term and safe investment, recently were yielding almost 2.5 times the aggregate yield of the 500 stocks in Standard & Poor’s composite index.

That’s the highest level for that ratio since the late 1980s.