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Fed’s Inaction Keeps Yields at Bay

While the Federal Reserve’s decision to keep interest rates near zero came as little surprise to most, the news – or lack thereof – means a continued struggle for investors seeking income.

Analysts say more action is likely next year, when officials might unveil changes to the way the agency communicates with the public and could debate another round of bond buying.  But today, 9 out of 10 Fed officials voted to keep policies unchanged. For investors, this largely means more of the same—ultra low interest rates.  “It’s increasingly difficult for investors who require income to meet their needs,” says Mitch Schlesinger, a financial adviser in Bethesda, Md.

The low Treasury yields are pushing investors to buy riskier bonds that offer more yield, advisers say. Schlesinger, for instance, is putting more money into investment-grade corporate bonds and high-yield bonds.  And T. Doug Dale, an adviser with Security Ballew Wealth Management in Jackson, Ms., is buying more emerging-market bonds from countries like Brazil, China and India that offer higher-yield bonds and have lower debt levels than many developed countries.  But Dale is still keeping a stake in Treasurys, which would do well if European debt problems worsen.

For stocks, the low-yield environment continues to push people into dividend-paying shares, says Devin Pope, an adviser with Albion Financial Group in Salt Lake City. Some companies like Pfizer and General Electric have also recently boosted their dividends, making the holdings more appealing for people who need the income.

But advisers caution against feeling too emboldened by those expectations. For instance, investors shouldn’t take the Fed’s word as a sign that it’s safe to invest heavily in longer-dated bonds, advisers say. While the Fed says it doesn’t plan to raise rates in the near future, rates can still come up if the economy grows faster than expected —  and investors holding longer-dated bonds would see prices drop more than those holding shorter-maturity bonds, says Schlesinger . “It’s a target and that target can change,” he says.

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