Rick Wurster, the chief executive officer of Charles Schwab Corporation NYSE: SCHW, said that fixed-income investments are more attractive than in recent years.
After years of low interest rates, investors have been forced to bail out on government bonds.
Schwab’s Wurster told CNBC that after the rate hikes by global central banks in response to post-pandemic inflation rates, fixed-income investments are once again attractive for those seeking steady returns and minimal risk.
The financial services giant saw a rise in interest in fixed income investments in its Q4 fiscal year.
Fixed-income investments are low risk.
Rick Wurster was positive about fixed-income investments during the interview, also because they offer “great rates” when written.
He added that the 30-year Treasury Inflation Protected Securities (TIPS) are particularly attractive for retirees who want to lock in a real yield of 2.5% with no inflation risk or other risks.
Fixed-income investments are now more suitable for diversification of portfolios due to their rising yields.
The remarks of the chief executive come just days after Charles Schwab announced its financial results for fourth quarter, which easily surpassed Street estimates. SCHW shares have risen by about 50% since their September low.
Could a 10-year Treasury Yield surpass 5% by 2025?
Larry Fink, BlackRock’s chief executive, spoke to CNBC in a separate interview at the World Economic Forum, held in Davos, Switzerland. He said that the yield on the 10-year Treasury could reach as high as 5.5%.
He added that a further increase in US10Y above the current 4.65% rate would “shock” the equity market and start a conversation about “how we are going to reduce our deficit”.
Fink, BlackRock’s CEO, said that President Trump’s focus to unlock private capital in order to spur growth could “create new inflationary pressures”. This could support higher bond yields and negatively affect the stock market.
The benchmark S&P 500 is up over 4% from its year-to date low as of this writing.
Why is higher bond yields bad news for the stock market
Bonds are more attractive than stocks when they have higher yields.
Investors are moving to bonds because of the higher yields, and the minimal risk. This has a negative impact on the demand for shares, which results in a drop in share prices.
Moreover, higher bond rates can make borrowing for businesses more expensive. This can lead to higher interest costs, reducing profits for corporations and discouraging growth, which can negatively impact stock prices.
Finaly, higher yields result in higher discount rates when calculating the present value for future cash flows.
Simple: higher yields reduce the present value of future earnings, which can lead to multiple contractions and lower stock values.
This post Is it a good time for fixed-income investors? This post may be updated as new information becomes available
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