Hello, YieldAlley readers! In this issue:

• The Federal Reserve Just Gave Income Investors a Longer Window to Lock In High Yields

• Tech Stocks Tumble on Chinese AI Breakthrough as Trump Escalates Trade Tensions

• Marriott’s Q1 promotion to earn 1,000 bonus points each night

• And more!

NEWS

Standout Stories

🔥 DeepSeek Has Gotten OpenAI Fired Up (Wired)

💸 How Retirees Can Determine a Safe Withdrawal Rate in 2025 (Morningstar)

📈 What If Stocks Only Rise 3%? (Retirement Manifesto)

🇨🇳 Here’s how tariffs on Canada, China and Mexico may impact U.S. consumers (CNBC)

🤖 How Are You Getting Value Out Of ChatGPT As A Financial Advisor? (Kitces)

MARKET THOUGHTS

Tech Stocks Tumble on Chinese AI Breakthrough as Trump Escalates Trade Tensions

• ECONOMY

  • The U.S. economy grew at a 2.3% annualized rate in Q4 and 2.8% for the full year 2024, driven by increases in consumer and government spending. While this growth exceeded the Federal Reserve's long-run forecast of 1.8%, it came in slightly below market expectations. Core PCE inflation (Personal Consumption Expenditures excluding food and energy - the Fed's preferred inflation measure) held steady at 2.8% year-over-year in December, marking the third consecutive month at this level. This remains above the Fed's long-term target of 2%, explaining why the central bank maintains a cautious stance on potential rate cuts.

• STOCKS

  • Markets experienced significant volatility, particularly in the technology sector, following the emergence of DeepSeek, a Chinese AI company. Their new open-source language model, which requires less energy and processing power than competitors, triggered competitive concerns that sent NVIDIA shares down nearly 17% on Monday. Despite this turbulence, strong earnings reports from major tech companies like Meta Platforms and Apple helped markets recover some losses later in the week. The Dow Jones Industrial Average managed to rise modestly, achieving its third consecutive week of gains, while the tech-heavy Nasdaq Composite faced steeper declines. Adding to market uncertainty, President Trump's administration announced plans for 25% tariffs on Mexico and Canada by February 1, while also threatening additional 10% tariffs on Chinese goods.

• FIXED INCOME

  • U.S. Treasury yields declined during the week, leading to positive returns for bondholders (as bond prices move in the opposite direction of yields). This decline in yields came as markets settled down from Monday's DeepSeek-related anxiety, suggesting investors were moving back from a risk-off stance. The relationship between bond prices and yields is crucial to understand: when yields fall, existing bonds become more valuable because they offer higher interest rates than newly issued bonds, causing their prices to rise. Despite the broader market activity, the investment-grade corporate bond market remained quiet with minimal new issuance - only three companies came to market on Tuesday. However, these new bond offerings were oversubscribed, indicating robust investor demand. Meanwhile, the Federal Reserve maintained its policy rate range at 4.25% to 4.50%, with Chair Powell suggesting they would need to see either meaningful progress on inflation or labor market weakness before considering rate adjustments.

INCOME BUILDING

The Federal Reserve Just Gave Income Investors a Longer Window to Lock In High Yields

This past Wednesday on January 29, 2025, Federal Reserve Chair Powell delivered a message that carried particular weight for income investors: monetary policy is "very well calibrated," and the Fed sees no urgency to lower rates from their current 4.25% to 4.50% level. During the press conference following the unanimous decision to hold rates steady, Powell provided crucial context about the economy's strength, noting that GDP rose above 2% in 2024 and recent indicators suggest continued solid expansion. This presents an opportunity for income-focused investors to navigate a period where high yields may persist longer than many had anticipated.

Powell emphasized that while inflation has "eased significantly" over the past two years, it remains somewhat elevated at 2.8% for core PCE. Particularly noteworthy for income investors is Powell's observation that housing inflation, which was "the single biggest factor that kept inflation high in 2024," is finally showing meaningful signs of moderation. The labor market has maintained remarkable stability, with unemployment holding steady at around 4.1% and payroll gains averaging 170,000 per month over the past quarter. This combination of moderating inflation and labor market stability suggests the Fed can maintain its patient approach, potentially extending the current period of attractive yields across various income-producing assets.

The fixed-income landscape presents particularly interesting opportunities given Powell's detailed comments about the disconnect between Fed policy and longer-term rates. Despite the Fed's three quarter-point cuts in late 2024, longer-term yields have actually increased, with the 10-year Treasury yield rising from 3.6% to 4.6%. Powell explained this counterintuitive movement by noting that longer-term rates respond more to expectations about future policy over the next several years rather than current Fed actions. This dynamic creates opportunities for income investors to lock in attractive yields, particularly in longer-dated securities, while the market adjusts to the reality that rate cuts may come more slowly than previously expected.

For real estate investors, Powell acknowledged that mortgage rates above 7% pose challenges. He specifically addressed an interesting dynamic where homebuyers are proceeding with purchases despite high rates, banking on the possibility of future refinancing opportunities. However, Powell cautioned that if rates "keep staying higher for longer, then will that hope evaporate and cause housing demand to deteriorate further?" For this reason, we suggest that income investors approach real estate-related investments with careful consideration of how different assets might perform if the current rate environment persists longer than expected.

We don’t believe that Powell mentioned anything that changes our stance for dividend stock investors. Powell observed that "consumers feel wealthier when their portfolio goes up, and that causes them to spend more" helps explain the economy's resilience despite high rates. Regardless of the environment, dividend investors should focus on companies with strong market positions and pricing power.

For income investors, the key message from both the Fed meeting and Powell's detailed press conference is the importance of positioning for an extended period of higher rates while maintaining flexibility to adjust as conditions evolve. The Fed's patient stance, combined with Powell's specific comments about financial conditions being "probably still somewhat accommodative," suggests that current income opportunities in both fixed income and dividend-paying equities could remain attractive for an extended period.

INCOME BUILDING

Cash Rates

Government Money Market Funds (7-Day Yields)

• SNVXX (Schwab Government Money Fund - Investor Shares): 4.10%

• SPAXX (Fidelity Government Money Market Fund): 4.03%

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.21%

• VMFXX (Federal Money Market Fund): 4.28%

Brokered CD Rates (6-Month Rate)

• Charles Schwab: 4.30%

• E*Trade: 4.25%

• Fidelity: 4.25%

• Merrill Edge and Merrill Lynch: —

• Vanguard: 4.30%

ETFs (30-Day Yields)

• SGOV (iShares 0-3 Month Treasury Bond ETF): 4.28%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 4.19%

• USFR (WisdomTree Floating Rate Treasury Fund): 4.25%

• TFLO (iShares Treasury Floating Rate Bond ETF): 4.23%

BONUSES

Brokerage, Bank and Credit Card Bonuses

Marriott: Earn 1,000 bonus points and 1 bonus Elite Night Credit each night.

Marriott's latest Q1 2025 promotion offers a straightforward way to accelerate both your points earning and elite status qualification. Members can earn 1,000 bonus points and one bonus elite night credit for each paid night stayed between February 11 and April 28, 2024, with no cap on the potential earnings. The promotion requires registration by April 14, making it particularly valuable for those planning multiple stays during this period or working toward elite status early in the year.

For frequent travelers, this could represent significant value - a 10-night stay during the promotion period would net an extra 10,000 points (worth approximately $70-$80 based on typical valuations) plus 10 bonus elite night credits, potentially accelerating status achievement by several weeks or months. This promotion is especially appealing for business travelers or those with planned trips during this period who can essentially double-dip on their elite night earnings.

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