Picking up Nickels

Friday, December 21, 2007

Fixed-income outlook for 2008

Boy, what a difference a year makes. Fixed income opportunities are certainly a bit less attractive than they were a year ago. Now let's see what we have to look forward to in 2008.

The FOMC has already cut the target funds rate by 100 basis points since September, with the cutting expected to continue when they meet again at the end of January 2008. Treasury Bill rates have fallen to the 3% level, which could give us a hint of how much lower the target fund rate could be cut from the current level of 4.25%. To make matters worse, Bill Gross of Pimco believes that we are already in a recession.

Further FOMC rate cuts will continue to drive down yields for many of the money market and savings accounts that were earning returns of 5% of better not so long ago. Looking at historical yields from the bellwether Orange Savings account from ING Direct , it is pretty obvious how its yield closely tracks changes to the Fed funds rate:

There are still some pretty good rates to be had out there though. Of course, the major gotcha is that current market leading yields are being offered by banks like Countrywide Bank, IndyMac Bank, and E*Trade Bank who need to pay a premium to get cash due to the credit crunch created by their cavalier home lending practices. If you decide to do the business with these lenders, please be sure that your deposits on account are below FDIC insurance coverage levels.

It's also looking like the Pentagon Federal Credit Union may be riding to the rescue once again with a first quarter CD promotion with above market rates for the fourth year in a row (details courtesy of Bank Deals blog). If the Penfed rumors are true, it may be our last and best opportunity to hedge against the imminent FOMC rate cuts.


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