Thanks to the near zero percent (and even negative!) interest rate policies of central banks, financial markets are certainly in a brave new world.
In other words, central bankers have set rates near zero – as the Federal Reserve has done with the Federal Funds rate – or even pushed them below zero.
Below zero rates mean depositors will pay just for the right to deposit money with its central bank.
Here is a simplified example that assumes negative rates are at minus 1% for consumers too: You deposit $100 into your bank account and guess what – it has suddenly turned into $99.
The New York Times put it nicely in an article last year.
It said, “When you lend somebody money, they usually have to pay you for the privilege. That has been a bedrock assumption across centuries of financial history. But it is an assumption that is increasingly being tossed aside by some of the world’s central banks and bond markets.”
Welcome to the world of negative interest rates and the hunt for yield globally.
Searching for Non-Negative Yields
What was once just theoretical is now a reality in Switzerland, Sweden, Denmark, the Eurozone and Japan.
Incredibly, we have roughly $9.5 trillion worth of sovereign bonds around the world that have a negative yield! That is actually down from a high of about $12 trillion before central banks began on the very slow road toward “normalization”.
To give you an idea of how strange things have gotten, consider Denmark. Some lucky home owners in that country now have mortgages with a negative interest rate. So their monthly payment consists of principal minus interest.
The reality of negative interest rates have affected not only you – the typical investor looking for a decent yield on your investments – but also institutional investors such as insurance companies and pension funds.
It has forced these institutions to look for yield… wherever they can get it.
The Search Lands in Argentina
That brings the hunt for yield to Argentina.
Earlier this year the country just issued $2.75 billion of U.S. dollar-denominated 100-year bonds. This followed the issuance of $16.5 billion worth of bonds in April 2016.
The only bad thing, from an Argentina viewpoint, is that they should have sold more bonds.
Investors couldn’t get enough of this 100-year issue. Argentina received orders for $9.75 billion worth of the bonds. In other words, there was three times as much interest in buying these bonds as were actually initially offered: a clear sign investors are desperate for yield.
The reason is obvious – the coupon was 7.125% and the bond sold at a slight discount, giving a very juicy yield of 7.91%.
Thanks to this high yield, yield-starved investors ignored the fact that Argentina has defaulted on its sovereign bonds eight times since its independence in 1816. As recently as 2001, the country defaulted on $100 billion worth of its sovereign bonds.
I understand that investors are giving a vote of confidence in Argentina’s leader President Mauricio Macri, who was elected in 2015. The country’s economy was on its knees thanks to the policies of former President Cristina Fernández de Kirchner.
But still, given its history, what happens when Macri leaves office? Luckily, with that nearly 8% yield, it will take investors only about 12 years to recoup their investment… assuming Argentina doesn’t default on the debt before then.
Investing When You’ve Gone Through the Looking Glass
Why have central bankers pushed rates so low and even into the negative zone?
The main reason given is to stimulate their respective economies. I believe it’s just the latest salvo in the ongoing “currency wars” to see who can cheapen their currency the most.
Either way, it seems that central bankers have Alice in Wonderland by Lewis Carroll on their bookshelves. Two quotes from the Cheshire Cat are particularly appropriate – “Imagination is the only weapon in the war against reality” and “We’re all mad here.”
So where does all of this leave you, the income-seeking investor in this Alice in Wonderland yield environment?
If you’re looking for broad exposure to bonds, here are a few ETFs worth a look:
- The iShares Barclays 20+ Year Treasury Bond ETF (Nasdaq: TLT). It is up 4% year-to-date and sports a 2.45% yield.
- The iShares IBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD). It’s up 3.1% year-to-date and has a yield of 3.17%.
- And for those of you a little more daring, consider the Powershares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY). Its current yield is 4.9% even though after a bit of spike in September shares have settled to up around 1% year-to-date. This ETF invests in dollar-denominated sovereign debt of more than 20 emerging market countries. The nice thing about this fund is that it has no more than 4% in any one country.
As long as the liquidity taps from the central banks stay open, yields should remain low giving these funds a boost.
One simple plan takes minutes to set up, yet could pay all your bills for life. No longer will your mailbox be stuffed with ‘payment due’ envelopes.
This is our most powerful plan we’ve ever put together…and over 6,042 people have already used its recommendations.
There is still time to start generating $4,084 per month for life…but the window is closing. Click here for complete details.