The Old Normal

Regular. Natural. Ordinary. Traditional. Normal. Most people desire tradition and normal times, a return to a better era or the good old days. COVID-19, 100-year floods, historic wildfires, and war in the Middle East have stirred up anxiety and unrest, which is abnormal.

During COVID-19, our government flooded the system with money and drove interest rates into the ground, and for several years, the yield on the US T-Bill was zero. Not normal. However, it’s not the first time interest rates have hit rock bottom – from 2009 to 2015, the rate was at or near zero. During the dark days of the Depression, the T-Bill paid zero interest from 1938 to 1940. The 97-year average T-Bill rate is 3.7%.

Last year, rates jumped from zero to 5.5%, and when interest rates spike, stocks, bonds, and real estate prices fall. In fact, long-term bonds crashed 26% last year. It was the worst correction ever, and we’re on the verge of the poorest three-year stretch in history. The bond market was returning to normal, but in doing so, left a lot of damage in its wake. From the COVID low, the yield on the one-month T-Bill soared 55,100%! It’s unlikely rates will climb that sharply again.

The current yield on the US 10-Year T-Note is 4.45%, still below the sixty-year average of 5.87%. It’s returning to normal. The 10-year T-Note is crucial for mortgage rates and several business indicators.

The 152-year average for long-term interest rates has been 4.49%, and they currently pay 4.09%. In 1981, rates peaked at 15%; in 2020, they bottomed at 0.93% – not normal. Today, interest rates are normal.

What does normal mean for you and your family? You can now enjoy better bond market returns with less volatility than we’ve experienced over the past several years. A stable bond environment benefits stocks and real estate as well. It’s now possible to receive income of 5% or more on several bonds and bond funds. For example, Vanguard’s long-term bond fund currently pays 5.42%, and T-Bill rates range from 5.2% to 5.5%.

The damage last year to bondholders was devastating and likely traumatized some investors for life. However, now that rates are normal, I encourage you to return to the bond market for a decent income stream.

Of course, interest rates can climb higher if inflation rises, so we recommend a mix of short-, intermediate-, and long-term bonds – and cash.

Bye-bye, and buy bonds.

The good old days are now. ~ Tom Clancy

November 18, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

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