BOND YIELDS BREAK OUT
Since September 20, Treasury bonds ranging from two to 30 years have hit fresh multiyear highs, putting further pressure on bond prices as they move inversely to yields. The iShares 20+ Year Treasury Bond ETF (TLT) saw its price plummet over 4% to reach fresh 12-year lows, marking a staggering 48% drop from its 2020 peak (chart next page). The Bloomberg Barclays U.S. Aggregate Bond Total Return Index, viewed as a barometer for the total bond market, posted a 2.5% decline in September alone.
We have discussed for months our expectations that bond yields would continue to rise, specifically on the intermediate and longer-end of the yield curve. This investment thesis has continued to play out over the course of the year.
Various economic elements such as persistent inflation, rising oil prices, tightening labor markets, and a resilient economy pushed yields higher throughout the summer. This created a backdrop for September’s dramatic shift of the yield curve as well as putting downward pressure on equities.
FED POLICY – HIGHER FOR LONGER
Adding to volatility in September was the Federal Reserve’s announcement to reaffirm another rate hike this year. They also indicated that interest rate policy will likely need to “stay higher for longer” as inflation continues to remain well above their 2% target.
Many investors have been caught off guard by Fed policy as market prognosticators have continued to factor in a series of rate cuts starting in 2024. Current economic data does not indicate that Federal Reserve policy has reached a sufficiently restrictive level, and the Fed has continued to reiterate that they will remain data-dependent going forward. Don’t expect a cut in 2023.
For example, in September, the already tight labor market delivered another positive surprise, with payrolls expanding by 366,000 jobs. In addition, numbers for July and August were revised higher by a combined 119,000 jobs, bringing three-month average job growth to 266,000. Unemployment remained at a healthy 3.8%. The robust job growth in September, along with positive revisions to data from July and August, could prompt central bankers to consider raising rates more aggressively than previously expected.
As more investors come around to the idea that rate cuts may be further out on the horizon, it has coincided with the steepening of the yield curve.
REAL YIELDS MOVING HIGHER
Based on a model by the Federal Reserve Bank of Cleveland, real yields have reached more than 1.7%. This is noteworthy because, until October 2022, real yields had not exceeded 1.3% for over a decade.
Understanding Nominal vs. Real Yields: In the world of finance, you’ll often hear the terms “nominal yields” and “real yields,” especially when discussing bonds. Here’s a simple way to understand the difference:
Nominal Yields: Is the interest rate that a bond pays you, without considering the effects of inflation. So, if a bond has a nominal yield of 3%, you’ll receive $3 for every $100 you invest each year.
Real Yields: Takes into account the impact of inflation. Let’s say inflation is 2%. If you have a bond with a nominal yield of 3%, the real yield would be 1% (3% – 2%). Real yield gives you a clearer picture of your investment’s true earning power.
RMDs: It’s That Time Again, Required Minimum Distributions Deadline Approaching
As the year winds down, it’s crucial to turn our attention to an important year-end financial obligation: Required Minimum Distributions (RMDs). For those of you who are 72 or older, or have already started taking your RMDs, the IRS mandates that a certain amount must be withdrawn from your tax-deferred retirement accounts, like Traditional IRAs and 401(k)s, by December 31st of each year. Failing to meet this requirement can result in a substantial penalty—typically 25% of the amount you should have withdrawn. The previous penalty was 50% but the number was reduced via the Secure Act 2.0.
Required Minimum Distributions are taxed as ordinary income. The amount you are required to withdraw is calculated based on the balance of your retirement account(s) as of December 31st of the previous year and your life expectancy as determined by IRS tables.
Personalized Support – To help you navigate this process, I will be reaching out to each of you individually to ensure that your RMD obligations are met in a timely manner.
QCDs – Qualified Charitable Distributions
For those who want to maximize your philanthropic giving, consider making a Qualified Charitable Distribution (QCD). This allows you to direct a portion of your RMD—up to $100,000 per year—directly to a qualified 501(c)(3) charity. The amount donated will not be included in your taxable income, making it a tax-efficient way to both meet your RMD obligations and support causes you care about.
SOCIAL SECURITY ANNOUNCES COST OF LIVING ADJUSTMENT (COLA)
Great news for those depending on Social Security and Supplemental Security Income (SSI) benefits—the Social Security Administration has just announced a 3.2% increase for 2024. Starting in January, if you’re among the more than 66 million Americans receiving Social Security benefits, you can expect to see a bump in your monthly payout. On average, the increase will translate to an extra $50 or more per month in your Social Security retirement benefits.
For the approximately 7.5 million Americans receiving SSI benefits, your increase will start a bit earlier, on December 29, 2023. It’s worth noting that some of you may be recipients of both Social Security and SSI benefits.
In addition to the cost-of-living adjustment (COLA), there are other changes to be aware of that kick in every January. One key change is an increase in the maximum amount of earnings subject to Social Security tax. This taxable maximum will rise from $160,200 to $168,600 based on an increase in average wages.
If you’re wondering when you’ll receive official word on your new benefit amount, keep an eye on your mailbox. The Social Security Administration will start sending out notifications in early December.
MAXIMIZE CONTRIBUTIONS TO RETIREMENT PLANS
The 401(k) contribution deadline is simple enough—it’s Dec. 31 of each year. If you intend to max out your 401(k) contributions each year, you have to do it before the deadline. The limit on employee elective deferrals for traditional and safe harbor 401(k) plans is $22,500 in 2023.
Pre-tax contributions to your company sponsored retirement plans will reduce your income taxes and increase your retirement benefits.
IRAs also have annual contribution limits, but the deadline is tax day (typically April 15) rather than the end of the year, so you have a few extra months to make your moves. In 2023, the maximum contribution is $6,500—$7,500 if you’re 50 or older.