Investment Grade Bonds Yielding 1.85%- What It Means

I hope that you all had a wonderful Thanksgiving holiday. What a crazy year it has been. Surely, these next few months will be historic as the vaccine rollout and distribution takes center stage. It would seem that these combined with better treatments such as the Regeneron and Eli Lilly AB programs, should be able to set the stage for a more normal 2021, but only time will tell of course.

This morning I saw a chart (listed above) showing that U.S. investment-grade bonds are yielding a paltry 1.85%, which is an all-time low. It is almost unbelievable to think that investors are willing to fund the debt of companies for such a small return, especially since there isn’t the same upside potential that exists in stocks. These yields might actually seem rich compared to the many trillions of dollars invested in government bonds at negative yields globally. These distortions are ultimately unsustainable. Retirees and pension plans must be able to generate income to meet their needs and goals.

What is interesting about it is high-quality dividend stocks have actually been out of favor, as most of the attention has been on the largest and most expensive Tech stocks. Almost all of the stocks that we own pay sizeable dividends of 3% to 8%, or even greater. These are not dividends that are likely to be cut either but instead should grow meaningfully.

While bond yields have been low for years, investors in bonds have benefited from appreciation from interest rate cuts, which stemmed from the pandemic and lockdowns. Those tailwinds are unlikely to last forever, assuming the global economy starts to grow again in 2021 and 2022. If that dynamic plays out, it would be hugely beneficial for our portfolios, which are geared to benefit from increases in interest rates. Money would likely shift from the most long-term and expensive speculative growth plays to companies that benefit from normalization and higher rates, that also offer more dividend income.

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