At the beginning of the year, the yield on 10-Year U.S.
Treasuries was just shy of 3% and appeared ready for takeoff into
the stratosphere. Alas, the long-awaited period of runaway interest
rates had arrived!
The something weird happened. U.S. Treasury yields
(ChicagoOptions:^TNX)- like a schizophrenic mad scientist straight
out of the movies - suddenly reversed course and have since fallen
around 14%. (Lower yields equal less income for bond investors,
more on that later.) Is this an isolated trend?
Actually, the "Great Yield Slide" is happening globally
Italy and Spain - countries that were recently on the brink of
defaulting on their debt - have experienced sliding yields too and
now pay just 6 to 18 basis points higher versus similar maturing
10-year U.S. debt (NYSEARCA:IEF). What's good for borrowers isn't
necessarily good for creditors, said nobody.
Good News! Stocks Have Reached a Permanently High
Does the current cycle of depressed bond yields still have
For whatever its worth, the International Monetary Fund (IMF)
gave its latest outlook of the U.S. economy and how zero percent
short-term interest rates could persist even longer than the
Federal Reserve is projecting.
The IMF states:
"The Fed currently has to contend with multiple areas of
uncertainty: the degree of slack remaining in U.S. labor markets;
the extent to which this slack will translate into future wage
and price inflation; and the transmission to the real economy of
a future move upwards in policy rates. These substantive
ambiguities make the outlook for U.S. monetary policy
particularly uncertain, as the Fed has repeatedly communicated.
At the same time, longer-term treasury yields and the term premia
have been compressed to very low levels. Under the staff's
baseline, the economy is expected to reach full employment only
by end-2017 and inflationary pressures are expected to remain
muted. If true, policy rates could afford to stay at zero for
longer than the mid-2015 date currently foreseen by
What do persistently low rates or yields mean?
From the fixed income or bond investor's perspective
(NYSEARCA:TLT), the decrease in bond yields has been offset by a
corresponding rise in bond prices. (See chart above) This might
seem like a blessing in disguise, but it really isn't. That's
because fixed income investors aren't buying bonds (NYSEARCA:BOND)
for capital gains - they want income!
If we use the 31% fall in 10-Year U.S. Treasury yields over the
past five years as a gauge, it serves as a rough approximation of
the 30% income blow that bond investors have taken.
In my recent video titled "
Yields Test 1999 Lows
" I talked about similar trend of lower yields for equity investors
A continuation of low interest rates - beyond the Fed's
arbitrary timeline for rate hikes - will happen quietly and catch
many by surprise. It will also bash income investors (like all the
times before) who use conventional income and dividend strategies
during these unconventional times.
On the other hand, persistently low rates is an ideal
environment for two industry sectors which are are up more than 38%
over the past three-years and were recently featured in ETFguide's
. Not that it matters, but both sectors also carry dividend yields
above 10-year Treasuries and 85% higher versus the S&P 500.
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