After five years of being told to brace yourself for rising interest rates that never materialized, you may have felt that income investing was beginning to feel like Waiting for Godot.
That is, until the middle of 2013. The yield on the 10-year Treasury note rose 1.3 points between May and September as the bond markets absorbed the real prospect of the Federal Reserve beginning to scale back the stimulus program that has kept rates abnormally low. The average intermediate-bond fund lost 4% in that stretch. The highest-yielding segments of the stock world — utilities, telecoms, and real estate investment trusts — also slumped.
Consider that the opening act to 2014. Now that the Fed is actually starting to taper its stimulus, rates will head up again. The increase is forecast to be less than last year’s, when the 10-year Treasury rose from 1.7% to nearly 3% at its peak.
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, expects the 10-year Treasury to rise to about 3.25% next year, around a half point higher than it was in mid-December. Other forecasters see an additional quarter-point increase. Still, notes Jacobsen, “the economy is growing, but not at a pace that would suggest even higher rates.”
So 2014 will continue to be a challenging time for income investors. With the wait for higher rates over, you need to take a fresh approach to balancing risk and income.