Thursday, September 22, 2011

"At Least Through mid-2013"

Yikes.

The Federal Reserve's announcement of so-called Operation Twist yesterday left the world's stock markets unimpressed. Stocks fell sharply across the board, and overseas markets also nose-dived.

The only securities rallying this morning are Treasury bonds, where traders are attempting to front run the Fed's buying of longer maturity bonds. 10-year Treasury rates now stand at 1.81%*.

I don't know if this will work - it seems to me that rates are already pretty low for anyone that wants to borrow money - but it adds to the pressure on investors.

Here's an excerpt from the Fed's announcement yesterday (I have added the emphasis):

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions...are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Fed is pushing savers to make a decision: Invest in stocks (or other volatile assets), or earn close to nothing for the next two years.

I believe that dividend-paying stocks remain essentially "the only game in town". Unless you're going to need the money in the next few months, large cap dividend-payers at least offer the combination of income and possible capital appreciation to offset future inflation pressures.

Oh, and if you still have a mortgage, and have some equity in your house, by all means run to your local bank and refinance.

*Whatever happened to the bond vigilantes, who were going to punish the profligate U.S. government with higher interest rates?