A Time for Time Deposits
The current market is a tough one for investors to navigate.
Equity markets appear to be all volatility and no return. According to Morningstar, the total return on U.S. equities for the last five years was only 0.33% per year, with large-cap stocks losing 0.23% per year.
Bonds have done better, due to the substantial decline in yields in recent years. Morningstar reports a five-year corporate bond return of 6.22% per year and an annual gain of 5.94% for U.S. Treasury bonds. However, with interest rates at or very near historical lows—at this time, the one-month Treasury yield is 0.15% and the five-year yield is less than 1.5%—further interest rate declines appear unlikely. If interest rates rise from current levels, intermediate and long-term bonds would suffer substantial losses. For example, if interest rates were to rise by 1%, a 20-year bond would lose about 12.5% of its value and a five-year bond would lose about 4.5%. Corporate bond defaults appear to have returned to low levels after peaking in 2008 and 2009, but yields on corporate debt are lower than they’ve been in over 40 years.
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Gary E. Porter , Ph.D., is associate professor of finance at John Carroll University, University Heights, Ohio.
James H. Gilkeson , Ph.D., CFA, is associate professor of finance at University of Central Florida, Orlando, Florida.