The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
Cause the heat is on
– Glenn Frey
For any industry, such as insurance companies, or individuals, such as retirees, “The Heat is On.” There is almost nowhere on the planet to get decent yields to either support your business or your lifestyle. The 2 year, three year, five year, seven year, and 10 year Treasuries are either at record lows or just off them. While there is the usual blather in the Press about the equity indexes, the rise in bond prices and hence the lowered yields, are barely mentioned.
Our historic low yields, and the effects of them, in my opinion, are one of the major reasons, if not the absolute reason, that our equity markets are rising. This is because, as bonds mature and run-off, that money is going into the stock markets on a hope and a prayer that appreciation will set-off the cash flows and our historically low yields.
INDEX 3 Month Return Yield
Treasuries 1.34% 0.399%
U.S. Corporates 7.79% 1.838%
U.S. High Yield 10.44% 5.289%
Municipals 5.21% 1.185%
*Data from Bloomberg
There are a number of key take-aways from this data. The low yields are certainly discernable, but I point to the compression that is taking place as the risk assets close in on Treasuries. Consider corporate bonds, only 1.439 points behind Treasuries. Virtually no risk premium for the bonds of our private enterprises versus our national debt. In other words, you are not getting paid for the risk and so money has circulated out of Investment Grade bonds and into the High Yield market, as well as equities.
What I am concerned about here is a downturn, any sort of a downturn, where equities correct, which they will at some point, or where even our risk asset bond classes no longer trudge along as every yield in sight is just off of Zero.
I mentioned insurance companies earlier and you can also throw in pension funds, leveraged municipalities, that have bonds outstanding, university endowment funds, banks and a whole host of other entities that have lived off of their fixed-income investments for years. They are in a world of hurt and many have increased their risk to such a level that the red flag of caution is being waved as you peer at their balance sheets.
The great mediator here is the Fed. They have now bought corporates, ETFs, municipals, high yield bonds and they have wandered off into other sectors of the markets which they have never entered before. Their balance sheet is unlimited, and they have turned the tide of all of the bond markets which is why we are seeing our historically low yields across the board. You may be able to fight city hall, but you cannot fight the maker of money, the Fed, and everyone knows it.
It is going to be years, if not decades, until we see appreciably higher yields, in my estimation. The Fed was created by Congress and one of its mandates is to support the government. As our nation fight our coronavirus pandemic, and issues more and more debt, what better way to help the country than by keeping our interest rates at all-time low levels. The cost of a ten year Treasury at 5.00% and a 10 year Treasury at 0.50% are very different numbers and so it is, as I have said before, a “Borrower’s Paradise” and a “Fixed-Income Investor’s Hell.”
We have lowered interest rates to near zero in order to bring down borrowing costs. We have also committed to keeping rates at this low level until we are confident that the economy has weathered the storm.
– Fed Chairman, Jerome Powell
Take what he says to heart. No higher rates anytime soon. We are in the thick of it and what he said here is not Fedspeak but the course the Fed has, and is, going to follow for the foreseeable future. To get any kind of yield you can try closed-end funds, some ETFs, and some tax advantaged funds. That is about it. The tried and true ways of the past are no longer working, and you have to be innovative in your approach to your investments.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.