Following the Fed’s statement this week—in which the Fed announced it would be tapering its quantitative easing program by another $10 billion per month—the 10-year Treasury yield has slumped to just 2.6%.
It seems that Mr. Market is taking Ms. Yellen seriously when she and her team say that “The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates.”
I, for one, agree. With inflation still close to nil and with the economy barely growing (1st quarter GDP came in at just 0.1%), I don’t see long-term yields rising appreciably any time soon. As we saw in the case of Japan, yields can stay depressed for decades after a credit crisis, and demand for yield from the retiring Baby Boomers means that we can expect buying pressure for the foreseeable future.
In forecasting lower yields, this puts me in a distinctly contrarian position, and I’m fine with that. When “everyone” is anticipating a market event, the chances of it actually happening are almost zero.
So, what’s the trade? Buy Treasuries?
No. While I expect bond prices to rise, there is not enough upside to interest me.
I prefer instead to buy the share of a “bond substitute” like Realty Income (O).
Realty Income is known as the Monthly Dividend Company, and for good reason. It has paid 524 uninterrupted monthly dividends and has raised its dividend 75 times since 1994.
There is nothing to dislike about Realty Income. At current prices, it yields an attractive 5.2%. And its track record has proven it to be a reliable payer with a long history of keeping pace with inflation.
The Trade
Buy shares of Realty Income and reinvest your dividends. Plan to hold as long as the dividend yield is above 4%. If the yield dips below that amount, it will mean the shares have appreciated to a point where I no longer feel comfortable holding.
Disclosures: Long O.
