We decided to give Steve McDonald a break from slapping faces. Today, we thought you’d enjoy reading his fantastic article on income plays. We initially published it in April. Hope you enjoy it!

According to a new Swiss Re report, the Fed’s efforts to maintain a zero interest rate environment have cost income investors $470 billion. Almost half a trillion dollars!

And those numbers include only losses up through 2013. The real number could be another 40% to 50% higher.

Maybe it’s more accurate to put it this way: Investors’ unwillingness to read the writing on the wall has cost them almost half a trillion dollars. That’s probably closer to the truth.

The average investor has hung on to their beloved FDIC-insured bank CDs and savings in the hopes that something would change.

It hasn’t.

And if the numbers I am seeing are even close to accurate, they won’t.

The Swiss Re report called the money printing and forced zero interest rate market “financial repression,” and it sees this causing more problems than just the loss of $470 billion in interest income.

Swiss Re Chief Investment Officer Guido Fϋrer said in a statement, “Crowding out investors due to artificially low or negative yields will reduce the diversification of funding sources to the real economy, thus representing a risk for financial stability and economic growth potential at large.”

That’s not great news for the real economy.

But whether the reduction of funding sources has long-term implications or not, the more immediate problem for those retired and about to retire – the main income buyers in this country – is how to pay their bills on yields of 1% and 2% from their bank investments.

Most already know they can’t. But most importantly, they are finally realizing this low-rate environment is not changing anytime soon.

The Royal Bank of Canada’s (RBC) head of fixed income said in a recent MarketWatch article that he can’t see anything on the radar that would cause a change in the current market. In other words, rates will remain low.

That means the small investor finally has to get out of guaranteed investments: CDs and savings. Most no longer have a choice.

A Big Shift

As I’m about to show you, this new “change or starve” condition is showing up in the historic buying levels recently seen in Treasury, corporate and municipal bonds. It is also a clear indication that a big shift in investor attitudes about rates is underway and bonds are their new focus.

The huge buying in just the first three months of this year in both the corporate and Treasury markets is staggering.

The buying in Treasurys has been unprecedented. It has driven up the price of the 10-year Treasury and the yield has dropped below 2%, again.

In fact, since the Fed’s comments after its March meeting, the yield dropped like a rock from 2.24% on March 6 to as low as 1.87% on April 1.

The buying in corporate bonds has also been on fire. In just the first three months of this year, $438 billion of investment grade and junk bonds were scooped up by what has been described by The Wall Street Journal as “willing buyers.”

That’s $54 billion ahead of last year’s record sales.

The second quarter of this year is expected to be the busiest on record for corporate bond sales, running just behind last year’s record pace.

Additionally, the current default rate of just 1.7% for the bad boys of bonds, junk bonds, has given many FDIC-only investors the confidence to move into yields in excess of 8%, even 9%.

One industry where corporate bond buying has been particularly strong is pharma. The chart below, courtesy of The Wall Street Journal, shows how strong the bond-financed acquisitions in the pharma area have been. But, more importantly, according to RBC, buyers have been standing in line to get them.

The next chart shows how even 10-year, A-rated corporate bonds are beating the CD market by as much as 96%: 3.16% vs. 6.21%. (Remember, A-rated corporate bonds are the most conservative.)

Also, the tax benefits of tax-free bonds for the 28% bracket and above can’t be ignored. Tax-free income can be a huge savings for many investors.

For example, the long-ignored and safer municipal bond market with 10-year maturities is also smoking the returns from CDs: 5.54% vs. 3.16%.

Particular Timing

The numbers from just the first quarter of this year make it pretty obvious investors are finally reaching out to the bond market in a big way.

But what is most convincing about this shift in investors’ attitudes is it is happening at a time when the Fed is threatening rate increases. That kind of news usually drives bond selling, not buying.

That in and of itself is compelling. It means the market does not believe the Fed’s threats of higher rates.

Most analysts think it could be years before we see anything that resembles a normal rate environment.

In fact, it has been so long since we have been anywhere near a normal rate environment, I can’t remember what one looks like.

How does 6% to 7% on 30-year Treasury bonds sound? That’s where the 30-year sat for most of my career in the money business. It is currently about 2.59%.

Hello? That’s $25.90 a year for a $1,000 investment that matures in 30 years. That means you earn a whopping $777 over the next 30 years.

If that isn’t reason enough to look for other ways to make money, how does $194 over 10 years from the 10-year Treasury sound? Granted, it is guaranteed. But that still doesn’t do me any favors.

I have been pounding the table about this for what seems like forever. But if the starvation diet the Fed has dropped on us is getting old, try something else. There are plenty of options and all of them pay a lot more than 1% and 2%.