If you ask Americans today which they would like most, a promising stock or an ample bond yield, my guess is that the bond would win by a landslide. Even though inflation is not eating away at purchasing power, declining incomes are. What people are hoping for, hunting for, is that reliable investment that steadily kicks off cash…for cars, movie tickets, grocery bills and, yes, portfolio growth. But what is available in the popular fixed income markets right now is not enough to finance a short taxi ride. Here ‘s a sampling of some current yields on Bankrate.com and the Wall Street Journal site:
Money market accounts: 0.75%
One-Year CD: 1.32%
Six-Month T-Bill: 0.195%
One-year T-Note: 0.261%
Five-Year T-Note: 1.616%
Ten-Year T Note: 2.959%
Take full measure of that 10-year yield. It’s asking you to give the U.S. Government a big chunk of your money for a decade—the same U.S. Government that’s been printing money faster than it can count—in return for a yield that is under 3%. Thank you, but I’ll pass. Sure, there are several smart money managers who insist that Treasuries are the best bet in town, and they certainly have been right so far this year. But it violates my sense of economics to believe that the long-term reward of a 2.96% Treasury is commensurate with the risk that our leaders will let the inflation genie out of the bottle before 2020.
Nevertheless, investors are snapping up longer term Treasuries and they are also loading up on emerging market debt as well as U.S. corporate bonds. The flows out of money market funds–some $434 billion so far this year, according to Lipper/AMG data–is largely into fixed income, with only a sliver into stocks. BofA Merrill Lynch credit strategists Hans Mikkelsen and Anurag Bhardwaj believe weak economic growth has replaced the European debt crisis as investors’ top worry, and with the Fed still loose, and inflation expectations down, investors are increasingly emboldened to reach out to the long end of the bond market.
Reaching for yield is one thing; loading up on credit risk, political risk and inflation risk—all real risks lurking in the credit markets— is quite another. To make it more literal, think Greece, GM’s bankruptcy, and that great inflation spike in the late Seventies, all stunning events that impoverished bondholders. To keep your risks down while trying to get your yield up, the Merrill strategists believe a diversified portfolio of 10-year A-rated industrial corporate bonds offer a pretty good tradeoff—a yield around 4% and a reasonable level of risk. Of course you could grab that yield in 30-year Treasuries but that’s a game for wild-eyed traders, not for ordinary people looking to pay bills.
By the way, in checking out various thinkers on the yield question I went to the PIMCO site to see Bill Gross‘ latest message. He says low returns from stocks and bonds will be with us for a long time to come but he also launches a long assault on automatic flush toilets and then, amazingly, ties toilets and fiscal policy together in a summary forecast. Go Bill!