Hello, YieldAlley readers! In this issue:

• Our Thoughts on Investing in Agency Bonds vs. U.S. Treasury Bills

• The Bull Market Turns Two Years Old

• Disney Parks Are Making More Than Ever in 2024

• And more!

NEWS

Standout Stories

🚕 Tesla Cybercab announced: Elon Musk’s robotaxi is finally here (The Verge)

🌪️ Natural disasters are making a mess of America. Private equity wants the cleanup cash (Sherwood)

✈️ Boeing to lay off 10% of workforce, warns of quarterly loss and weaker sales (MarketWatch)

👾 AI 'Godfather' Yoshua Bengio: We're 'creating monsters more powerful than us' (Yahoo Finance)

🧑‍💻 Microsoft CEO Satya Nadella calls two CEOs a day: Here’s what he asks (Yahoo Finance)

MARKET THOUGHTS

The Bull Market Turns Two Years Old

• The current bull market reached its two-year anniversary, with stocks gaining about 60% since October 2022.

  • This gain is in line with the historical average of past 11 bull markets since 1957.

  • The S&P 500 has reached 45 new record highs during this period.

• Economic and market conditions have evolved significantly:

  • Inflation has decreased from over 8% to 2.4% headline and 3.3% core.

  • GDP growth has averaged a strong 3% over the past two years.

  • The Federal Reserve has shifted from aggressive rate hikes to beginning a rate-cutting cycle.

• Looking ahead:

  • Most bull markets historically last until at least the end of their third year.

  • Economic growth is expected to slow but remain positive, around 2-2.5%.

  • The Fed is anticipated to continue rate cuts, aiming for a policy rate of 3-3.5%.

  • Corporate earnings growth will likely need to drive further market gains, as valuations have limited room to expand.

• Key trends to watch:

  • Potential broadening of market leadership beyond mega-cap tech stocks.

  • The performance of cyclical sectors and value-style investments.

  • Geopolitical risks and the upcoming U.S. election as potential sources of volatility.

  • Q3 earnings are expected to grow 4.2%, marking the fifth consecutive quarter of growth.

  • Analysts project 15% earnings growth for next year, though this may be optimistic.

• Unique aspects of this bull market:

  • It's the only time the S&P 500 equal-weight index hasn't outperformed the market-cap weighted index in the first two years.

  • Growth investments have significantly outperformed value investments.

INCOME BUILDING

Our Thoughts on Investing in Agency Bonds vs. U.S. Treasury Bills

Last week, we reviewed a variety of fixed income alternatives to U.S. Treasury Bills for income investors. The appeal of agency bonds stems from their more attractive yields compared to U.S. Treasuries, while still being relatively safe investments. At the time of writing, some agency bonds were offering yields of up to 6%, outpacing many Treasury securities. This yield premium comes with a slight increase in risk, as most agency bonds are only implicitly backed by the U.S. government, rather than explicitly guaranteed like Treasuries.

Agency bonds are debt securities issued by federal government agencies or government-sponsored enterprises (GSEs). While many investors are familiar with corporate bonds (which can vary from safe investment grade debt to riskier junk bonds), agency bonds occupy a unique middle ground between the safety of U.S. Treasuries and the higher yields of corporate bonds. Agency bonds were created to support various sectors of the economy, from housing to agriculture, agency bonds play a crucial role in the U.S. financial system.

Agency bonds come in two main flavors:

1. Federal Government Agency Bonds: These are direct obligations of the U.S. government, explicitly backed by its full faith and credit, similar to U.S. Treasuries. An example includes Ginnie Mae (Government National Mortgage Association), a federal agency that guarantees mortgage-backed securities. Unlike Fannie Mae and Freddie Mac, Ginnie Mae is fully owned by the government and its bonds carry the same credit risk as U.S. Treasuries – essentially none.

2. Government-Sponsored Enterprise (GSE) Bonds: While not explicitly guaranteed by the government, these bonds are considered to have implicit government backing. Examples include Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), which are GSEs created by Congress to support the housing market. They buy mortgages from lenders, package them into securities, and sell them to investors. While not officially government-guaranteed, the market generally assumes the government would step in to prevent a default, hence the "implicit" backing.

For income investors considering agency bonds, you should consider the following:

1. Risk Tolerance: Agency bonds, particularly GSE bonds, carry slightly more risk than Treasuries. The main risk is credit risk – the possibility, however small, that the agency might default. For federal agency bonds like Ginnie Mae, this risk is essentially the same as Treasuries. For GSE bonds, there's a theoretical risk that the government might not step in during a crisis, though this is generally considered unlikely. In comparison, U.S. Treasuries are considered "risk-free" in terms of credit risk, as they're backed by the full faith and credit of the U.S. government.

2. Tax Implications: Interest from some agency bonds, like those from Fannie Mae and Freddie Mac, is exempt from state and local taxes. This can be advantageous for investors in high-tax jurisdictions. U.S. Treasuries offer a similar tax advantage – their interest is exempt from state and local taxes. However, both agency bonds and Treasuries are subject to federal income tax.

3. Investment Minimums: Agency bonds often have higher minimum investment requirements than Treasuries, ranging from $1,000 to $25,000 or more. This can make it harder for smaller investors to diversify their holdings. In contrast, U.S. Treasuries can be purchased in increments as low as $100, making them more accessible to a broader range of investors.

4. Liquidity: The agency bond market is less liquid than the Treasury market. This means that if you need to sell before maturity, you might have to accept a lower price or wait longer to find a buyer. U.S. Treasuries, on the other hand, are considered the most liquid securities in the world. They can typically be bought or sold quickly with minimal impact on price.

5. Call Risk: Many agency bonds are callable, meaning the issuer can repay the bond early, usually after a specified period. This is often done if interest rates fall, allowing the agency to refinance at lower rates. For investors, this means potentially losing a high-yielding investment and having to reinvest at lower rates. Most U.S. Treasuries, except for some long-term bonds, are not callable. This gives investors more certainty about their future cash flows and makes Treasuries easier to value.

An example of an agency bond is debt issued by the Federal Home Loan Banks (FHLB) system, a group of 11 regional banks that support mortgage lending and community investment. Earlier this year, the FHLB offered bonds yielding close to 6%. While not explicitly government-guaranteed, FHLB bonds are widely considered to be very safe investments due to their implicit government backing.

It's crucial to note that as you move from Treasuries to agency bonds in search of higher yields, you're accepting additional risk. While this risk is generally considered minimal, factors such as credit risk and call risk become more prominent. Additionally, the tax treatment of agency bonds can vary, potentially impacting your after-tax returns.

What's Your Take?

We're curious to hear your thoughts on agency bonds. Are you considering them as part of your fixed income strategy? Are agency bonds on your radar, or are you sticking with Treasuries? Let us know by responding to this email!

INCOME BUILDING

Cash Rates

Government Money Market Funds (7-Day Yields)

• SNVXX (Schwab Government Money Fund - Investor Shares): 4.56%

• SPAXX (Fidelity Government Money Market Fund): 4.60%

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.78%

• VMFXX (Federal Money Market Fund): 4.80%

Brokered CD Rates (6-Month Rate)

• Charles Schwab: 4.45%

• E*Trade: 4.75%

• Fidelity: 4.40%

• Merrill Edge and Merrill Lynch: —

• Vanguard: 4.45%

ETFs

• SGOV (iShares 0-3 Month Treasury Bond ETF): 5.03%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 4.89%

• USFR (WisdomTree Floating Rate Treasury Fund): 4.84%

• TFLO (iShares Treasury Floating Rate Bond ETF): 4.87%

BONUSES

Brokerage, Bank and Credit Card Bonuses

Brokerage Bonuses

• E*Trade (still active): Up to $4,000 in bonuses for deposits made within 60 days of enrollment. The lower deposit bonuses are also excellent, with E*Trade offering a bonus of $100 for a deposit of just $50. Offer here.

  • Use promo code PROMO24.

    • $50+ will receive $100

    • $1,000-$24,999 will receive $150

    • $25,000-$49,999 will receive $150

• tastytrade (still active): Offering up to $5,000 in bonuses. Lower deposit bonuses are attractive, with a $100 bonus for a deposit of $5,000 (2% return). Offer here.

• Robinhood (still active): Offering a 1% bonus for transferring any table brokerage holdings. No maximum, but deposits must be held for two years after account opening. Offer here.

Bank Bonuses

• BMO Harris (active) — Earn up to a $560 bonus when you open a new Smart Advantage or BMO Harris Premier checking account. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry

• Axos Bank (active) — $500 when you open a new rewards checking account with promo code RC500 and certain requirements. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry.

Credit Card Bonuses

• American Express Marriott Bonvoy Brilliant Card — Get 185,000 Marriott Bonvoy points after $6,000 in spend within the first six months of account opening. Offer here through October 2, 2024.

  American Express Marriott Bonvoy Bevy Card — Get 155,000 Marriott Bonvoy points after $5,000 in spend within the first six months of account opening. Offer here through October 2, 2024.

• Barclays jetBlue Plus Card (active) — Get 80,000 JetBlue points after $1,000 in spend within the first 90 days of account opening. Offer here.

• Chase Ink Preferred (active) — Get 120,000 Ultimate Rewards bonus points when you spend $8,000 in the first three months after account opening. Offer here.

• Capital One Venture (active) — Enjoy $250 on Capital One Travel in your first year and earn 75,000 bonus miles after spending $4,000 in the first 3 months. Offer here.

• American Express Hilton Surpass Card (active) — 150,000 points Hilton Honors points after spending $2,000 in 3 months. Get an additional 50,000 points after spending a total of $10,000 within the first 6 months. Offer here.

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