MONTHLY INTEREST RATE COMMENTARY TABLE
Each month's newsletter features an update on interest rate trends and where opportunities appear. Members see the most recent table of interest rates displayed in a format which allows them to compare yields on various types and qualities of fixed income securities. The table shows the change in rates for the month, for year to date and yield spreads (spreads refer to the different in interest income between different securities expressed in basis points i.e. 100 basis points is 1 percent.)between each security class and 10 year U.S. Treasuries for the month and since the beginning of the year. Changes in yields and spreads are often indicators of where certain rates are headed and where the best buying opportunities are.
|Security||Yields||Net Change||Net Change||Spread||Spread|
|U.S. TREASURIES & EURO BENCHMARKS|
|Ten Year Euro(1)||3.38||23||43||74||-46|
|Euro Spot Rate||1.433||-453||258|
|Corporate Bonds 2|
|Preferred Stocks 3|
|AA & A||6.65||-12||-232||676||281|
|Qualifie d dividend income (QDI) PFDs 4||â€” Yields â€”|
|Municipal Bonds 5||â€” Yields â€”|
2 Per Merrill Lynch.
3 Per the Income Securities Advisor Index.
4 Eligible for 15% tax rate. Yields shown at after tax % of US Treasuries rate.
5 Per Bloomberg. Yields shown at after tax % of US Treasuries rate.
EXPLANATION OF INTEREST RATE TABLE
The monthly table displays Current Yields for ten-year maturities of various debt instruments compared to the benchmark ten-year Treasuries. Note that preferred stocks often have no maturity or are callable in less than ten years.
The Net Change for the month- and year-to-date shows the change in basis points (100 basis points equals 1% in yield). A change in the U.S. Treasury rate is considered a change in the risk-free interest rate. The changes for the other securities reflect this same change plus whatever other risks investors perceive at the time.
The change in Spreads represents the difference between risk-free ten-year U.S. Treasuries and each security. A widening of spreads means an increased concern about credit quality. A sudden widening of spreads is considered a flight to quality. Spreads identify which securities are out of line with historical relationships and represent buying opportunities.
Since Municipal Bonds are tax exempt, their yields should be looked at in terms of their percentage of Treasury yields. Thus, if a muni yields 87% of Treasuries, it means it should be considered by anyone whose incremental tax rate is higher than the reciprocal of that number, or 13%. Hence, the higher the yield percentage, the lower your incremental tax needs to be, to make munis attractive or to look at them another way, more of their income is retained after taxes.