In the bond markets, in my opinion, there is no value left. This is true from both angles, "Absolute Value" and "Relative Value." On an absolute basis we are just off our all time low yields. Yes, the 10 year Treasury has backed up some but, as it did, the credit markets tightened as everyone, and his brother, scrambles for yield.
Bloomberg sets their U.S. Treasury Index at 0.628% with a duration of 7.13 years. In the meantime, their U.S. corporate bond index has tightened to 1.842% with a duration of 8.75 years. This is a spread of just 121.4 basis points for bonds with a credit risk. More remarkable is their high yield index. It is yielding just 4.56% which is just 393 bp's to Treasuries and 272 bp's to investment grade corporate bonds.
I assert, currently, you are not getting paid for credit risk and this is certainly a major consideration when you look at your portfolios. Neither do I see it changing any time soon. U.S. yields continue to be the highest for virtually all major countries, and that will continue to be a source of buying power for American debt for the foreseeable future, in my view. As a matter of fact, the European Central Bank has virtually assured us that they are going to add to their assets in December which will drive down yields in the European Union even further.
Between "Absolute Value," and "Relative Value," many people, and institutions, are caught in a major squeeze play. I deal with a number of major institutional money managers. The life insurance folks, I am told, cannot make any money on their portfolios at these levels and yet they cannot go to far afield because of their regulators and their fear of being downgraded by the ratings agencies. They are trapped, and there is just no getting around it.
I have made some suggestions to them which will help at the periphery but their core holdings, and their traditional buying patterns, are under assault. This is all being caused by the Fed, and the other major central banks, who are helping the nations they represent with historically low yields but, at the same time, they are causing havoc for investors.
Our "Borrower's Paradise" continues to be a "Fixed Income Investor's Hell" and, with the Fed promising very low yields, for the next several years, this problem will not be going away anytime soon. What will be quite interesting, as our new Administration takes power, is how much heat will be put on the Fed to buy a broader range of securities and to drive down yields, like the European Union, Switzerland, and Japan, into negative yielding territory. Each increase in Federal spending is going to turn up the heat and, in my opinion, the American deficit is going to expand, next year.
A view of where we might be headed is illustrated by the 2 year sovereigns, listed below:
Current Yield
U.S. 0.160 %
Australia 0.110 %
Belgium -0.735 %
Denmark -0.622 %
France -0.692 %
Germany -0.729 %
Italy -0.406 %
Japan -0.124 %
Netherlands -0.721 %
Spain -0.582 %
Sweden -0.371 %
U.K. -0.031 %
If America approaches the levels of these other countries then our banks, insurance companies, pension funds, university endowments and retirees are in for real trouble, in my opinion. It is not just profits but lifestyles, that will diminish, and you can expect a howl of protests from all of those who are affected. You can hear the anguish now, but the cries for help are likely to increase in volume.
One of my fears here is that our senior and retirees could get into major trouble, as they leave the bond markets for riskier bets. Any kind of downturn in equities, as one example, could send these people into major problems which may result in political fallout. Having grandma and grandpa forced from their homes will not be a welcome occurrence for anyone, of either party.
Investing for a little above nothing is one thing. Investing for less than nothing is another thing altogether, and far worse.
"Watch out now, take care
Beware of greedy leaders
That take you where you should not go…"
- George Harrison, Beware of Darkness
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
