Searching For Safe Yield

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Again this week, the Federal Reserve Board repeated its intention to keep interest rates near all-time lows for an extended period of time. Clearly, the Fed is concerned about the economic recovery’s fragility, despite the greatest amount of stimulus in U.S. history. Accordingly, it will continue to be difficult to earn any significant safe yield on fixed income securities.

We have already taken steps to improve–at least slightly–the yield on completely liquid, short-term securities. The FDIC has restricted the yield banks can offer on certificates of deposit. With worldwide financial volatility as high as it is, we believe that these restricted rates–beyond one, two or three months–are insufficient to justify tying up funds for longer periods of time. We are particularly unwilling to tie up money for multiple years for yields of just a few percent. The inflationary picture and interest rates could change dramatically within a year or more.

Through a newly-initiated program, we will boost portfolio yield by putting portions of client portfolios into multi-year CDs at yields currently around 2%. We will avoid tying the funds up for years, however, because in the few selected banks we are able to redeem those CDs early with only minor penalties. If we hold the CDs beyond four months, we will earn more, even after penalties, than if we were to keep the money in short-term securities.

While we do not anticipate that interest rates will remain at current low levels for more than a year, they could if the economy remains weak and the Fed remains in rescue mode. If no more attractive alternatives appear in the meanwhile, we retain the option to leave the money in the CDs and continue to earn the stated yield.

In an environment in which even countries are in increasing danger of default, there are great risks in all financial areas. Even holding short-term cash equivalents could prove destructive, should the dollar’s value decline precipitously or if Fed loose-money policies lead to runaway inflation.

We have no way of knowing what sequence of events will strongly affect markets in the months ahead. We do know, however, that events could unfold rapidly and unexpectedly. That puts a premium on remaining highly liquid in order to take advantage of opportunities that could present themselves quickly should markets overshoot realistic levels.

Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to or call (520) 529-2900 to speak with one of the Portfolio Coordinators.