by Bryan Perry

January 9, 2024

As the bond market anticipates lower interest rates ahead, there is a mighty sea change underway within the broad income-generation space for investors seeking to lock in higher yields. The yield on the 10-year Treasury bond fell to 3.77% from 5.00% within six weeks, only to bounce back to 4.07% following last week’s stronger-than-forecast headline jobs data – despite all the downward revisions in the details.

Specifically, December non-farm payrolls increased by 216,000 (versus the expected consensus 162,000), but November payrolls were revised down to 173,000 from 199,000, and October payrolls were revised to 105,000 from 150,000. Worse yet, October private sector payrolls were revised to 44,000 from 85,000.

An added concern was that the December ISM Non-Manufacturing (service sector) Index, representing the largest sector of the economy, decreased to 50.6 (consensus: 52.5) from 52.7 in November. The dividing line between expansion and contraction is 50, so the December reading tells us that service sector activity grew at a slower pace than in November. December marked the 12th consecutive month of growth for the services sector, but at a pace that threatens to slip into contraction territory in January.

Meanwhile, the ISM Manufacturing data has been in contraction territory for over a year. The ISM Manufacturing PMI for December checked in at 47.4 (consensus: 47.1), up from 46.7 in November. December marked the 14th straight month the manufacturing PMI reading has been below 50.


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Taken together, the jobs, manufacturing, and non-manufacturing data point to an economic slowing in the first quarter of 2024. The one good piece of data released was the Prices Index, which fell to 45.2 from 49.9, reflecting a further easing of inflationary pressures. The yield curve has responded in kind to these softening numbers, inverting further with the 2/10 spread widening out to -35 basis points.

Assuming that a nascent deflationary trend is underway, those juicy 5%+ yields for 1-10-year maturities vanished from the market during the past two months, leaving investors with not-so-juicy 4%+ yields, with a rising probability of 3-30-year maturities falling to 3%+ levels over the next couple of months.

It looks like the opportunity to lock in 5% in the Treasury market for something longer than six months has already left the station, and with the Fed targeting at least three rate cuts in 2024, rolling 6-month Treasuries and CDs seems like a road of income attrition.  Here are current Treasury yields and trends:


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Of the 11 sectors that make up the S&P 500, the real estate and utilities sectors might provide a nice alternative to low-yielding bonds, given the lower inflation outlook and the Fed’s path to bring short-term rates down, beginning as early as March 20.* Stocks in both the real estate and utilities sectors reversed off their three-year lows to levels not seen since early 2020, when the pandemic was in full force. They deserve a hard look here, especially with the bond market now digesting its torrid fourth-quarter gains.

Several REITs currently pay yields in excess of 5%, and a handful of blue-chip utilities pay yields north of 4% in qualified dividends that cap the tax rate at 20%. Income from REITs is taxed as ordinary income because REITs by law must pass through 90% of earned income and are not taxed at the corporate level.

So, instead of settling for a locked-in 4% for 5-10 years, per the table above, investors can get the same or higher yields plus tax preference and potential capital gains from two sectors that are well off their highs.

While there are many similarities among electric utilities, the REIT sector is fragmented into distribution warehouses, data centers, cell towers, healthcare facilities, shopping malls, resort properties, industrial properties, self-storage facilities, and office properties which have come under serious scrutiny in the new world of remote work-forces where vacancy levels have soared, and property valuations have plunged.

It is still prudent to avoid office space REITs, even though the dividend yields are tempting. If their Funds from Operations (FFO) remain under pressure, REIT operators will have to pay dividends in the form of return of capital or just slash the payouts to reflect the lower future income when negotiating new leases.


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

During the current period of market digestion with bond yields bumping a bit higher, it makes sense that there will be some backing-and-filling in the real estate and utilities sectors to coincide with the bond market consolidation. During this window of time, and well before the Fed starts cutting rates, investors have time to add some attractive dividends to their portfolios from two sectors that are U.S. based and have a history of outperforming when the Fed pivots their monetary policy to that of easing.

*The tentative 2024 pre-election policy announcement dates for the Federal Open Market Committee (FOMC) fall on Wednesdays: January 31, March 20, May 1, June 12, July 31, September 18, and then during election week.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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