Income Monitor: Q3 2019

The Global X Income Monitor for this quarter can be viewed here. This report seeks to provide broad, macro-level insights into the income characteristics of various asset classes and strategies.

The beginning of Q4 marked the closing of the Federal Reserve’s second round of interest rate cutting. The Fed cut rates for the third time in 2019 in October. The yield curve steepened with the Fed’s latest round of stimulus. A brief period of flattening gave rise to concerns about the economy, but those fears subsided on stronger domestic economic numbers. The challenge, once again, is how investors find income. We expect the Fed to hold rates steady from here, but there’s close to no real yield from traditional fixed income investments today.

Energy is the only sector that pays high dividend yields following years of poor performance. Technical selling overrides the attractive valuations currently found in the sector. Master Limited Partnerships (MLPs) are a prime example of that dynamic. Fundamentals in the asset class remain strong, but prices fell through most of Q3. A 2020 turnaround in MLPs could be imminent if valuations normalized.

Real Estate Investment Trusts (REITs) present a problem and a solution for income investors today. REITs rallied significantly as the Fed cut rates, but yields are precipitously dropping. Now may be an opportune time to look for more attractive valuations in the REIT space, such as those with higher. Mortgage REITs often comprise this pocket of the market, and typically benefit from a steeper yield curve.

Covered calls are another potential approach to generate yield as it harvests volatility for income generation.