The Fed Funds Futures are very different today from a week ago after Ben Bernanke and his minions at the FOMC predicted that rates would be “exceptionally low through at least the end of 2014.”  Prior to that, it was a mid-2013 promise.  The reality is the FOMC has no obligation to commit to any time frame and the late-2014 was a projection rather than a commitment.  Still, this was a ‘risk-on’ signal if there ever was one.

Fed Funds Futures are now showing a 100% chance of a rate hike in December 2013.  That is the first month where the price is under 99.75 and this is the first time in quite a while that a rate hike has been this close.  What is interesting is that there is still close to an 80% chance of a rate hike by August of 2013.  Should you panic?  Absolutely not.  The rate hike would just remove the 0.00% to 0.25% range up to a formal 0.25% Fed Funds Rate.

It is still all the way out to September of 2014 now before the Fed Funds Futures are calling for a 100% chance of a 0.50% Fed Funds Rate.

Daily rates can be seen here for Fed Funds Futures from the CME.

JON C. OGG

The Institute for Supply Management has issued its reading for January non-manufacturing and the data is strong.  Very strong.  At 56.8, this is the best reading in almost a year.  Dow Jones was only calling for a reading of 53.1.

The business index was 59.5 versus 55.9 in December.  Employment showed the biggest gain to 57.4 from a prior December reading of 49.8 and prices rose only to 63.5 from 62.0 in December.  Even new order picked up to 59.4 from 54.6 in December.

The news this morning, particularly after the stellar jobs numbers, is really hurting longer-dated Treasury prices and driving yields higher.  The Fed Funds Futures are signaling a much quicker rate hike scenario than just a week ago.

The iShares Barclays 20 Year Treasury (NYSE: TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and its price is down 2.3% at $116.39. The ProShares UltraShort Lehman 20+ (NYSE: TBT), which is double inverse the price action (intraday) is up a whopping 4.6% at $19.32 on the day.

JON C. OGG

In today’s annual outlook speech, Ben Bernanke has said that the FOMC is prepared to look at other actions to support the economy.  More importantly, Bernanke telegraphed that another round of easing is on the table but no formal decision has been made as of yet.

Is that QE3 or QE4?  Either way, Bernanke and friends are already introducing the United States to the same rate structure as Japan.  Now we just have to see what more forms of Utopia Juice they can cook up to serve the masses.  Hopefully it is not what they drank in Jonestown.

JON C. OGG

The core inflation (ex-food and energy) projections are:

• 1.5% to 1.8% in 2012
• 1.5% to 2.0% in 2013
• 1.6% to 2.0% in 2014

The headline inflation rate projections are as follows:

• 1.4% to 1.8% in 2012
• 1.4% to 2.0% in 2013
• 1.6% to 2.0% in 2014

For Jobless rate expectations, the new projections are as follows:

• 8.2% to 8.5% in 2012
• 7.4% to 8.1% in 2013
• 6.7% to 7.6% in 2014

Here is the U.S. GDP expectation ranges:

• 2.2% to 2.7% in 2012
• 2.8% to 3.2% in 2013
• 3.3% to 4.0% in 2014

Here is the expectation ranges for when the first rate hikes will come up:

• 2 of 17 officials: sometime in 2016
• 4 of 17 Officials: sometime in 2015
• 11 of 17 Officials: sometime in 2014 Or Later
• 3 of 17 Officials: sometime In 2013
• 3 of 17 Officials: sometime In 2012

JON C. OGG

What was new and unexpected was the comments on how long exceptionally low interest rates will remain in place.  Rather than through mid-2013, the FOMC now has language that will accommodate that near-zero rate stance at least through late 2014.  If that is not a dovish Fed, there never has been one.

Everyone has been wondering if quantitative easing would expand via QE3 (or QE2.5)… Let’s just be honest.  This is more like QE4.

Fed governor Lacker sought to leave out the expected time period for the incredibly low interest rate horizon.  The Fed will also regularly review the size and the composition of its holdings and it is currently maintaining the plan to reinvest mortgage debt principal payments.

The Fed will also continue expanding the maturity of securities, which was that “operation twist” that has been in effect.

The wording was that global financial markets still pose significant risks and the unemployment rate is likely to decline only gradually with a modest pace of economic growth in the coming quarters.  Inflation is subdued and expectations remain stable for inflation.

Other notes: Housing remains depressed, business investing has slowed, household spending continues to improve.

The Fed left the Discount Rate flat at 0.75% and the vote was 9-1 for the Fed Funds Rate action with the sole dissenter being Lacker.

JON C. OGG

SPDR Barclays High Yield Bond (NYSE: JNK) carries a 7.7% listed yield and is up 0.25% at $39.00 against a 52-week range of $34.09 to $40.93 and it is the primary ETF we look at when it comes to the world of high-yield or junk bonds.  Then there is the iShares iBoxx High Yield Corporate Bond (NYSE: HYG) up 0.1% at $89.69 with close to a 7.7% yield and a 52-week range of $77.90 to $92.85, followed by the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSE: PHB) that is flat at $18.34 with a yield of about 6% and a 52-week range of $17.00 to $18.76.  You have to consider that the 10-Year Treasury yields close to 2%, but high-yield and junk bonds often pay 7%, 8%, or more.  Here are some of the top closed-end funds, although there are many more out there:

• Blackrock Corporate High Yield (NYSE: HYV): market cap of $396 million with shares up 0.3% at $12.02; 52-week trading range of $10.10 to $12.60; implied yield of 8.5%.
• Pioneer High Income Trust (NYSE: PHT): market cap of $480 with shares up 0.7% at $17.07; 52-week trading range of $14.12 to $18.08; implied yield of 9.6%.
• PIMCO High Income Fund (NYSE: PHK): market cap of $1.5 billion with shares down 0.1% at $12.62; 52-week trading range of $10.52 to $14.88; implied yield of about 8.5%.
• AllianceBernstein Global High Income Fund, Inc. (NYSE: AWF): market cap of $1.2+ billion with shares up 0.9% at $14.47; 52-week trading range of $12.43 to $15.41; implied yield of 8.3%.
• Western Asset High Income Fund II Inc. (NYSE: HIX): shares are up 0.4% at $9.84; 52-week trading range of $8.35 to $10.45; implied yield of about 10.0%.
• Western Asset High Income Opportunity Fund Inc. (NYSE: HIO): shares are up 0.8% at $6.32; 52-week trading range of $5.34 to $6.63; implied yield of 8.0%.

We do advise investors to study the current premium and discount that each closed-end fund trades at compared to the net asset value.  Some are discounts and some are premiums, and these can fluctuate wildly through time for a myriad of reasons.

While that is a composite and while the “BB” is now under 500 basis points over Treasuries, the “B” spread is now under 750 basis points over Treasuries.  Maturities matter here as the longer-dated notes and bonds command higher spreads than most shorter-dated instruments.  Still, this could be the beginning of a wave of continued interest in junk bonds.

What is interesting is that rising yields in Treasuries implies losses on the face value of bonds.  If the yields are rising because of an improving economic picture rather than because of inflation or because of a lack of faith in the underlying creditworthiness of the government, then the bond spreads are likely to contract further and that would drive the interest into high-yield junk bonds.

Be advised that not all junk bond funds are created equally outside of the ETFs.  Some closed-end funds use domestic junk bonds only, while some use international bonds.  Some include foreign-issue sovereign debt at junk levels or trading as though they are junk.  Aslo, some use a bit of leverage while others do not.  The dividend yields are “implied” because ethe closed-end funds pay monthly.

Another caveat needs to be mentioned… Some of the yields on financial quote screens also will differ from our implied yields because we do not include the capital gain distribution that comes with many of these.  They of course count toward your total return, but we like to look at the most recent ‘regular dividend’ when calculating yields.

We have provided a chart for the “JNK” ETF Below so you can see how much this sector has risen since Thanksgiving and then again since the selling climax of stocks and risk instruments (including junk bonds) in early October.

A true chartist would tell you to watch this current level closely.  If prices do not rise from here, it could be representative of a false break-out and that would imply a near-term top.  As long as the “risk-on” mentality prevails, these should do well.  The trick is watching longer-term Treasury yields.  With close to a 2% yield on the 10-Year Treasury Note, investors will seek higher returns as long as those returns are likely to have at least some degree of price stability.  If investors think that Treasury yields are likely to climb suddenly to 3% or even 4%, junk bonds will have some competition from the risk-free trade again.

As you would expect, there is no such thing as a free lunch in the financial markets.

JON C. OGG

• Spain is “A” rated
• Italy is now rated BBB+
• Portugal was downgraded to Junk with a “BB” rating

It was back in early December that S&P put these nations on CreditWatch Negative. This news was telegraphed throughout the trading day and was largely responsible for the market sell-off today.

JON C. OGG

The DJIA is down about 1% and the iShares MSCI France Index Fund (NYSE: EWQ) ETF is down 2.8% at $19.19 today.  Oddly enough, iShares MSCI Germany Index Fund (NYSE: EWG) is down 3.4% at $19.41 and it is not even supposed to be in the direct downgrade nations.  Alcatel-Lucent S.A. (NYSE: ALU) is taking it on the chin the worst with a drop of 6.1% at $1.69.

What is being reported as a Reuters news break is as follows:

Breaking News: France TV channels say France rating downgraded by S&P, citing government source

What we would like to address is that this has been in the works in for quite some time.  The Euro-zone debt crisis after the U.S. lost its Triple-A rating was the final straw.

Among other nations we see as downgrade candidates, these are Austria and Finland as the two most likely after France and Austria would be before Finland.  iShares MSCI Austria Index Fund (NYSE: EWO) is down 1.4% at $14.03.

As far as Germany, Luxembourg, and the Netherlands, that is going to depend upon the brains over at S&P.  So far it seems that Germany may avoid the downgrade.

JON C. OGG

The average yield is -0.0122%, down from a whopping 0.001% previously. We would be watching PowerShares DB German Bund ETN (NYSE: BUNL) and PIMCO Germany Bond Index ETF (NYSE: BUND) in reaction.  There is also the parabolic PowerShares DB 3x German Bund ETN (BUNT) as well, but there may be much different tracking issues on a leveraged exchange traded product that has different trading hours than the market it tracks. 

At issue is not whether or not this persists forever, because it cannot be the case.  It is unfathomable if not mathematically impossible.  More important is what the implication is for overnight and money market funds.  In the U.S., these are supposed to trade “at the buck” and that implies that the value is always $1.00 per share no matter what and that interest is paid out.  The firm hosting the fund has to have a management fee of some sort as well.

When negative rates are paid out it implies that the money market funds are paying out a negative yield and that implies that the funds are “breaking the buck.”

Again, this cannot go on indefinitely but it can create new previously uncharted problems in the near-term.  It is not exactly as if the European banks and fund management families are going to want to pay up the difference to keep the fund values at the equivalent of 1.00 in Europe.

No wonder the Euro has lost so much against the Dollar.  At least the German investors can get about 0.1% in America.

JON C. OGG

It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.