What should you do when long-term rates are low and short-term rates relatively low?
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Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Manny Schiffres, the Chief Investing Editor of Kiplinger's Personal Finance Magazine to talk about Investing for Yield. Manny, it seems to be a strange time of the income markets between short-term investments, long-term investments, exactly where do we stand now?
Manny Schiffres: Well, short-term investments in the form of money market funds and short-term bank CDs are decent, paying in the neighborhood to 5%. Long-term investments are punk, long-term treasury bonds yields are under 5% and historically, you get paid more to extend your maturities. Now you actually going to be pay less to extend your maturities in the treasury bond market.
Kevin McCormally: What's going on?
Manny Schiffres: The reason that yields are so low apparently is because a lot of money splashing out of the financial markets much of it from overseas and many of those are people are using their dollars to buy treasury bonds and that's pushing down yields to long-term bonds.
Kevin McCormally: And all those short-term returns seem to be find out there is a threat to them in the future too.
Manny Schiffres: Well the risk of money market funds and something like a bank loan refund which can pay above money market fund rates is that a Federal Reserve will begin cutting short-term rates. Those kind of instruments tend to follow the Fed actions and they would actually see a decline in yields if the Fed would have cut short-term rates.
Kevin McCormally: Okay, Manny what something is after a higher yield supposed to do these days?
Manny Schiffres: We have to take more risk in some. You could investment in a junk-bond fund might pays 6.5%, 7% and if you really want to go add and grab a lot of yield, you invests in some exotic investments. Business Development Company which is a stock that invests in other smaller companies might be one possible way. You could find some like Allied Capital Corporation that yield about 8% or you can invest in an Oil Royalty Trust, these are investments that basically just sell oil and pass on the net profits and you could find then the yield 12% or 13%.
Kevin McCormally: But that means more risk.
Manny Schiffres: Absolutely, if the price of oil goes down you are likely to see a loss.