Investment Insights
Mike Jones
I have heard it said that if you live long enough you will see it all. While that may not be wholly true, there is an element of truth to it.
If anyone had told me back in the high interest rate period of the 1980’s that the world would experience the low rates we’re seeing today, I would have staked my career on quite the opposite. But crazy things happen.
Looking back on a 32 year career, I can recall “black Monday,” the “dot com saga,” “9-11,” and the “global financial crisis” as events that significantly altered the financial landscape.
The most current phenomenon that will go down in financial history as highly significant and unforeseen is low to “negative” interest rates. Like the other significant events or eras listed above, that which we are experiencing now was not on the radar of the mainstream financial service industry.
Looking back, I and many others can tell you how we got to this point, but don’t trust anyone who tells you that they saw it coming. They didn’t.
Because the central bankers around the world see avoiding another worldwide “Great Depression” as their number one purpose in existing, they continue to use every tool in their toolbox to attempt to stimulate the economies of the world. This had led to lowering of interest rates, expansion of central bank balance sheets, as well as asset purchases (primarily bonds) which were designed to lower and lower interest rates.
And guess what? It has worked. We have somehow avoided global recession since 2009.
Of course the question must be asked, “At what cost?” Unfortunately we do not know the answer to that one at this time.
What we do know is that this absolute desire to avoid not just a depression but even a recession at all cost is having significant repercussions to the savers of the world.
Competing with these central banks for fixed income assets are savers. As you can see below, a long term look at interest rates on the 10 year US Government Bond and the 30 Year Mortgage Rate demonstrates just how low these interest rates have gone.
Long-Term Look at the 10-Year Note Yield
A log-scale snapshot of the 10-year yield offers a more accurate view of the relative change over time. Here is a long look since 1965:
Source: http://www.advisorperspectives.com/dshort/updates/Treasury-Yield-Snapshot
The 30-Year Fixed Rate Mortgage
Source: http://www.advisorperspectives.com/dshort/updates/Treasury-Yield-Snapshot
Shocking, isn’t it? As investors we must ask where do we go from here? Answer: No one knows.
Never say rates can’t go lower. It has also been proven unwise to say higher rates are just around the corner.
My answer has been to look for the highest possible diversified yet prudent yield and monitor things. I believe that being flexible and modestly dynamic will allow an income investor to navigate these most unusual of times best.
