MONEY
JO N
91
S.
S P IS IA K
LOTTING THE INVESTMENT YIELD CURVE
you own money m arket in stru m en ts, certificates of deposit or other short-term cash equivalents, you know firsth an d th a t they are not providing th e yields they once did. In fact, yields on these short term investm ents are a t their lowest point in two decades— and th ere is no telling when th is situation will change. If you m ain ta in a sizable portion of your portfolio in these short term investm ents, you could be sacrificing income potential and facing reinvestm ent risk. Longer-term in terest rates have not been h it nearly as h a rd as short-term rates. And if you’re looking for higher retu rn s, consider “averaging up the yield curve.” W H A T ’S T H E Y IE L D CURVE?
Also called “extending m atu ritie s,” averaging up the yield curve m eans diversifying
80
JADA, Vol. 123, September 1992
into securities w ith longer m atu rities and higher yields. Does this m ean th a t you m u st buy a 30-year bond in order to get a good return? The answ er is no. And a look a t the
Yields on these short-term investments are at their lowest point in two decades—and there is no telling when this situation will change.
yield curve will explain why. A yield curve is a graph th a t m easure yields paid by sim ilar fixed income investm ents according to th eir m aturities. You could plot a yield curve for tre a su ry securities or one for corporate bonds of the same quality. Plotting the yields beginning w ith the shortest m atu rities and ending w ith the
longest m aturities produces a line th a t slopes upw ard—a “positive” slope. M A T T E R S O F M A T U R IT Y
A positive slope m eans longer m aturities yield higher returns, b ut th is is not th e end of the story. Remember: the longer the m aturity, the higher the risk from lost liquidity. If you’re a safety-conscious investor, you probably w ant to lim it risk as much as possible. T h at’s why you should consider extending m aturities into the “interm ediate sector” of the yield curve. Broadly defined, the interm ediate sector includes m atu rities of more th an one year and less th a n 10 years. Between the short and long of it, th e interm ediate sector can help you find the right balance between risk and rew ard. You can extend m atu rities and get a higher re tu rn th an short-term investm ents provide, w ithout
Source: Dean W itter Reynolds, Inc.
shouldering the risks associated w ith long-term securities. The slope of the yield curve helps you m easure the advantage of extending m atu rities into the im m ediate sector. W hen th e curve is positively sloped, it m easures how fast yields rise relative to increases in m aturity. The steeper the slope, the less m aturity extension an investor needs to achieve higher returns. N O T A L W A Y S P O S IT IV E
The slope of the yield curve is not always positive. For example, in a very strong and potentially inflationary economy, short-term yields m ight be higher th a n long-term yields, leading to a negatively sloped or “inverted” yield curve. This w as th e situation very briefly in December 1989, when certificate of deposit and money
m arket yields were higher th an long-term rates. Before th at, the last inverted yield curve came in th e spring of 1982. Most of the tim e, the yield curve does have a positive slope. It pays, therefore, to become fam iliar w ith a strategy such as extending m aturities. Right now, the yield curve is not only positively sloped, it is very steep. T hat m eans you could be well rew arded for even a modest extension of m aturities. ■ M r. S p is i a k is s e n i o r v ic e p r e s i d e n t , i n v e s t m e n t s , D e a n W i t t e r R e y n o ld s , I n c . B e fo r e a c t i n g o n t h e a d v i c e p r o v id e d h e r e , d e n t i s t s s h o u l d c o n s u l t t h e i r o w n i n v e s t m e n t c o u n s e lo r s , a c c o u n t a n t s o r la w y e r s .
JO N
91
S.
S P IS IA K
LOTTING THE INVESTMENT YIELD CURVE
you own money m arket in stru m en ts, certificates of deposit or other short-term cash equivalents, you know firsth an d th a t they are not providing th e yields they once did. In fact, yields on these short term investm ents are a t their lowest point in two decades— and th ere is no telling when th is situation will change. If you m ain ta in a sizable portion of your portfolio in these short term investm ents, you could be sacrificing income potential and facing reinvestm ent risk. Longer-term in terest rates have not been h it nearly as h a rd as short-term rates. And if you’re looking for higher retu rn s, consider “averaging up the yield curve.” W H A T ’S T H E Y IE L D CURVE?
Also called “extending m atu ritie s,” averaging up the yield curve m eans diversifying
80
JADA, Vol. 123, September 1992
into securities w ith longer m atu rities and higher yields. Does this m ean th a t you m u st buy a 30-year bond in order to get a good return? The answ er is no. And a look a t the
Yields on these short-term investments are at their lowest point in two decades—and there is no telling when this situation will change.
yield curve will explain why. A yield curve is a graph th a t m easure yields paid by sim ilar fixed income investm ents according to th eir m aturities. You could plot a yield curve for tre a su ry securities or one for corporate bonds of the same quality. Plotting the yields beginning w ith the shortest m atu rities and ending w ith the
longest m aturities produces a line th a t slopes upw ard—a “positive” slope. M A T T E R S O F M A T U R IT Y
A positive slope m eans longer m aturities yield higher returns, b ut th is is not th e end of the story. Remember: the longer the m aturity, the higher the risk from lost liquidity. If you’re a safety-conscious investor, you probably w ant to lim it risk as much as possible. T h at’s why you should consider extending m aturities into the “interm ediate sector” of the yield curve. Broadly defined, the interm ediate sector includes m atu rities of more th an one year and less th a n 10 years. Between the short and long of it, th e interm ediate sector can help you find the right balance between risk and rew ard. You can extend m atu rities and get a higher re tu rn th an short-term investm ents provide, w ithout
Source: Dean W itter Reynolds, Inc.
shouldering the risks associated w ith long-term securities. The slope of the yield curve helps you m easure the advantage of extending m atu rities into the im m ediate sector. W hen th e curve is positively sloped, it m easures how fast yields rise relative to increases in m aturity. The steeper the slope, the less m aturity extension an investor needs to achieve higher returns. N O T A L W A Y S P O S IT IV E
The slope of the yield curve is not always positive. For example, in a very strong and potentially inflationary economy, short-term yields m ight be higher th a n long-term yields, leading to a negatively sloped or “inverted” yield curve. This w as th e situation very briefly in December 1989, when certificate of deposit and money
m arket yields were higher th an long-term rates. Before th at, the last inverted yield curve came in th e spring of 1982. Most of the tim e, the yield curve does have a positive slope. It pays, therefore, to become fam iliar w ith a strategy such as extending m aturities. Right now, the yield curve is not only positively sloped, it is very steep. T hat m eans you could be well rew arded for even a modest extension of m aturities. ■ M r. S p is i a k is s e n i o r v ic e p r e s i d e n t , i n v e s t m e n t s , D e a n W i t t e r R e y n o ld s , I n c . B e fo r e a c t i n g o n t h e a d v i c e p r o v id e d h e r e , d e n t i s t s s h o u l d c o n s u l t t h e i r o w n i n v e s t m e n t c o u n s e lo r s , a c c o u n t a n t s o r la w y e r s .
