10-25-19

Bond Yields

Traditionally, U.S. treasury bills have been viewed as a safe investment. This wisdom still holds true today, because the U.S. government is a very reliable debtor which has always repaid its creditors in full and on time. For this reason, it may sound like a great idea to invest your money into U.S. treasury bills today. But where are the risk-free returns of 4%, 5% or even 6% of the past? They are a gone. Today, we live in a literal world of loose monetary policy. See graph10-Year International Government Bond Yieldsfor yields of economically strong governments from around the world.

Three interesting facts stand out from the graph above. First, all of these governments offer a very low bond yield, as all yields are below 2%. Second, the U.S. government offers the highest yield in the group above. Third, the bond yield of some countries is negative.
 

Monetary Policy

The explanation for all three facts all can be traced back to the fact that we live in a loose monetary policy world with the goal of stimulating economic activity. Central banks set low interest rates and in addition purchase fixed income assets, such as bonds. This drives down the yield of bonds, because it creates a mismatch between supply and demand. Central banks purchase more bonds per year than they issue to the market. In the U.S., the discrepancy is smaller, while in some countries this mismatch is so great that it results in negative yields. These actions are undertaken to drive investors out of “safe” investments into riskier asset classes, such as stocks. 

Effect on Stock Market

The stock market has become addicted to the interventions by central banks in recent years. Generally, speaking a decrease in interest rates results in a rise of the stock market, while in increase in interest rates has the opposite effect.  
 
This effect could be observed in the U.S. stock market quite well about one year ago. After a series of interest rate hikes by the Federal Reserve, the stock market began to slide in October 2018. When bond yields hit 3.20% the market dropped by almost 10% in the same month. Eventually, the Federal Reserve began cutting interest rates, the yield began to drop and the market began to rise again. This becomes evident starting in March 2019. See graph Relationship S&P 500 and 10-yr U.S. T-Bill Yield for details.

Recent Fed Announcement
 
On October 11, 2019, the Federal Reserve also announced that it would continue to repurchase U.S. government starting in October 2019 through the second quarter of 2020. In doing so, the Federal Reserve wants to spend $60 billion per month. See screenshot of Tweet by the New York Fed for details.

The official explanation is to return liquidity to the level of early September 2019. However, this is clearly an attempt to bolster the stock market and spur on the economy. It is also a continuation of the liquidity shortage that we described in our last news blast. The consequence of this action is that high interest rates between 4% to 6% become even further out of reach and you have to find another asset class to invest your money.
 
 
As an investor, we want to give you the choice where and how you invest your money. We would like to introduce you to first deed lending, an asset class that provides excellent security and a high rate of return. Therefore, we encourage you to become a real estate lender.