Why this Spike Will Perforate Yield Chasers
by Wolf Richter •
Record moneys suddenly pile into the material of debt crises.
The Institute of International Finance opined last week that “the ‘low for long’ interest rate outlook now looks more like ‘low forever’ – an outcome that has unleashed a powerful renewed search for yield.”
Japanese investors, such as pension funds and insurance companies, are swarming into US Treasuries now more than ever.
Europeans are doing the same thing, buying US Treasuries, but also US corporate bonds, and even US junk bonds.
“NIRP refugees” we’ve come to call them. They’re trying to escape their central bank’s iron-fisted financial repression where bond buyers are guaranteed to lose money if they hold bonds to maturity, which many institutional investors need to do – such as pension funds and insurance companies. It impacts everyone since they’re managing the money of regular folks.
But where do American investors go to chase yield, now that Treasury yields are disappearing before their very eyes?
Junk bonds. And they have soared, and yields have plunged over the past few months.
And dividend stocks. Even classic bond buyers are switching to stocks that pay a dividend, to get a little extra yield. But companies can eliminate dividends in no time, and the yield goes to zero while the stock dives. A bond would be in default if the issuer were to stop paying the coupon. By that time, bankruptcy lawyers are circling. But cutting a dividend is routinely done during market downturns, and yield investors who switched from bonds to dividend stocks have a rude awakening.
Investors who chased yield this far and got in late, especially in bond mutual funds and ETFs, are going to pay the price. Chasing yield, especially late in the game, is one of the more costly forms of excitement.
DYI comments: We are in a "double hit collision" ending phase, cyclical and secular tops for stock and bonds especially corporate and very low quality junk bonds. When a world wide recession arrives causing a deflationary smash here in the States - stocks, corporate bonds and especially low quality junk bonds will be smashed. Treasury bonds however will move up smartly in price dropping yields for 10 year T-bonds below 1% and 30 year T-bonds below 2% with 5 year notes and bills going negative! Gold will move up nicely in price along with the U.S. dollar and Treasury securities as world wide players seek a "flight to safety" irregardless of yield or no yield in the case of gold.
Chasing yield I don't believe the average Joe way of excitement but more out of desperation especially for retiree's attempting to stretch their remaining dollars. QE, operation twist, outright buying of stocks and bonds(foreign central banks) is complete insanity. When the deflationary smash arrives the Fed's along with 1st world central banks will QE to staggering levels setting up DYI's scenario for the inflationary 2020's. Until then ultra low inflation/deflation will rein supreme.
No matter how this plays out we know for certain stock and corporate bond markets are insidiously overvalued. How ruinous to one's financial health? A standard pension asset allocation of 60% stocks - 30% bonds - 10% cash(T-bills) estimated average annual REAL return is now 0% to 2% FOR A 20 YEAR HOLD!
HOLD ONTO YOUR HATS AND YOUR CASH - BETTER VALUES AWAIT!
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AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 7/1/16
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DYI
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