There they go again – the pundits predicting a spike in long-term interest rates and suggesting income investors keep their powder dry until these higher rates emerge. As television background noise, it’s harmless, but as prudent investment advice, well, watch out for your pocketbook.
After all, no one makes money waiting for an indeterminate occurrence at an unknowable time.
But suppose for a minute that as municipal bond investors, we are inclined to follow the interest-rate sages and sit tight for awhile. As we wait (and wait) for some magic moment to arrive, we will park our cash in a money-market fund and be rewarded with an interest rate of around .02%.
Unfortunately, that paltry return is only a fraction of the rate of inflation, which means, of course, that we would actually realize a negative return. That is, we would be paying for the privilege of parking our funds.
How long will this last? What is the interest rate we’re waiting for before it’s time to jump in? Lacking a crystal ball, we’re not sure, so we continue to wait. And wait.
Meantime, the clock continues ticking, and income we’ve sacrificed from investments we’ve decided not to make keeps piling up. Worse, if and when the special day arrives and the pundits change their tune, it will take considerably higher rates and many years – if ever – to make up for the income we’ve surrendered while waiting for the all-clear signal.
Time marches on
We warned of this trap in an article almost 11 years ago, “The Cost of Waiting.”, and discussed it periodically ever since (“Watch Your golf Game, Not Interest Rates”; “Time Flew, But Interest Rates Didn’t”). Over the years, little has changed, including interest rates, which have continued to confound the experts by remaining subdued.
Waiting is a costly and frustrating exercise. It deprives income investors of the most fundamental advantage of successful investing – the compounding of interest. Remember, with a negative return, there’s nothing to compound and more income to try to recover.
As generations of successful bond investors can attest, buying long-term bonds when funds are available, and triggering a steady flow of tax-free income, is a lot simpler – and considerably more profitable – than trying to divine interest rates and parse the pundits.