I recently read an interesting article in the Professional User’s Guide to MONEY Magazine which I would like to share here. It might help those of us who are formulating new investment strategies or rebuilding our portfolios. The theme? We should look for clues in the bond market to help us gauge how the broader economy is doing. There are definite signs that we are in the early stages of a rebound.
The Yield Curve
The yield curve is the range of rates paid by short- and long-term bonds. Since longer-dated bonds typically pay more than short-term debt, the yield curve usually slopes upward. During periods of economic uncertainties, the curve is flat, as it was in the summer of 2007. We can look at the yield curve to clue in on what professional bond traders are thinking.
So what is the curve telling us now? 10-Year Treasuries are paying 2.6 points more than two-year notes, creating a steeper curve – a sign that growth is on the horizon. Although some believe that the upward sloping curve is caused by the Federal Reserve is keeping the short-term rates artificially low. In either case, the article recommends that in a slow recovery, you want to inv est in financially strong firms that offer the potential for stable, dependable growth and solid dividends.
The Vanguard Dividend Growth (VDIGX) offers a low-cost way to do just that. We are big fans of Vanguard funds here, as many of its funds are 3-6X cheaper than comparable funds. When investing for the long term, it really pays to be cheap.
To follow trends in the yield curve, go here. Below are what the bond markets look like as of today.
