Executive Summary
Although the US GDP deflator was 3.1% in the last quarter, it is still below the yield fixed-income dependents are receiving. The Federal Reserve (Fed) has set interest rates above 5%, and thanks to that commercial banks are offering higher yields for savings accounts — just above 4.5%. The 10-year US Treasury Bond is trading around $96 with a 4% coupon rate and a 4.46% yield to maturity. Buying some TLT around now is appropriate as yields and coupon rates are higher than usual; as the bond matures you will get a satisfactory capital gain since bond prices are much lower than the average, $100, while offering higher coupons and yields than average. Also, keeping your money in a 4% or higher high-yield savings account would be another great investment decision.
Why People Relying on Fixed-Income Should Care About This Economic Indicator!
The GDP deflator is an inflation measure of all domestically produced goods and services, excluding imports. This coincident economic indicator helps investors and traders gauge how much inflation affects their investment returns. Fixed-income investors feel a greater impact than those investing in other assets such as equities or commodities. By the end of this report, investors and traders should be able to make an educated decision about their money allocation into bonds or high-yield savings accounts.
Key Points
In Q1 '24, GDP Deflator accelerated to 3.1%, slightly above the 3% consensus estimate. Just below 2.5% is the desired rate as it goes along with the Fed 2% inflation target; the GDP deflator is a few percentage points away from being considered stable.
Investment Analysis
The 3.1% increase of the US GDP deflator is the equivalent of a -3.1% decline in the overall purchasing power of the US dollar; therefore, the average consumer and those who depend on fixed income for a living are not getting the most out of their hard-earned money. Nonetheless, people holding cash without earning any interest on it are the ones having a bad time since the Fed interest rate is at 5.50%. As long as interest rates remain above the GDP deflator, people relying on fixed income will earn positive real returns on their bond portfolios or high-yield saving accounts.
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