Where To Get Income In A Low-Yield World

Gold Projected to Beat the Market in 2020: CLSA

So far in 2020, the yield on the 10-year Treasury has averaged an anemic 0.01 percent when adjusted for inflation. Since the end of January, it’s actually dipped below 0 percent, trading as low as negative 0.14 percent on January 31.

What this means is that investors are guaranteed to lose money on the 10-year T-note if held until maturity.

It’s against this low-yield backdrop that Judy Shelton, one of President Donald Trump’s nominees for the Federal Reserve Board, went before the Senate Banking Committee last week for her confirmation hearing. A former Trump campaign advisor, Shelton is seen as an unconventional pick for the central bank role for two main reasons: 1) She’s advocated for a return to the gold standard, and 2) She has recently argued in favor of lower interest rates—which could have the effect of pushing not just inflation-adjusted yields but also nominal yields into negative territory.

Some have already speculated that, if Shelton is confirmed and Trump wins reelection this November, she may be tapped to replace Jerome Powell as Fed chair when his term ends in 2022. During his tenure, Powell has repeatedly come under fire by the president for not cutting rates fast enough—something Judy Shelton may be more willing to do.

A lower-for-longer monetary environment has its benefits, to be sure. It’s great for borrowers. It makes it easier for companies and governments to service their debts. It encourages consumption. Indeed, rock-bottom borrowing costs have fueled U.S. household debt over the past decade, lifting it above $14 trillion for the first time at the end of 2019. Credit card debt alone hit a record $930 billion.

(Click on image to enlarge)

U.S. Household Debt Crossed Above $14 Trillion for the First Time

 

Negative Yields to Cost Investors $1 Trillion in 2020

What’s good for borrowers, though, is not always good for investors and savers. Low-to-negative rates make it challenging to generate income, and this may push investors into riskier assets such as non-investment grade and junk bonds.

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Disclaimer: A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range ...

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