Visualizing The Near-Zero Bond Yield Problem
With contributions by Charles Bowyer.
In response to the recent record-setting market volatility, the Federal Reserve has responded with ramped up monetary stimulus, including cutting the Fed Funds rate, and as of this writing, beginning an “unlimited” quantitative easing program. As the Fed pushes down interest rates, it’s worth keeping in mind that we were already at historic lows for bond yields. According to a report by Visual Capitalist on historical interest rates, bond yields have been generally declining for over 700 years.*
In the West, we’ve experienced a dramatic downward trend in the yields of government bonds. The trend extends back nearly 700 years, and as you can see in the cluster of purple dots on the far right of the chart (representing US Treasuries), it’s only accelerated in recent times. What this chart shows is that, despite occasional and brief spikes in interest rates, the trend has been moving towards lower and lower yields.
As time has gone on, the investor turning to bonds has been getting less and less back per dollar invested.
Now, one could argue that the 700-year trend doesn’t really matter, and that instead we should focus only on interest rates in the recent past. Fair enough. Let’s look at what’s happened since the end of that chart. Statista recently reported on the Federal Reserve’s attempt to “shield the economy” by cutting interest rates further. **
Rates were at over 5% (still very low by historical standards) before the Great Recession in 2007. Then the Fed slashed them dramatically to deal with that crisis and kept them at near 0% for years. We had a very brief period of rising rates, which never even reached 3%, before the slash to deal with this crisis. The Fed’s recent actions follow the historical trend of declining interest rates.
Let’s take a look at another potential investment that shares some characteristics with bonds: real estate.
The chart above shows the historical returns as of end of January 2020 for REITs (represented by the FNRETR Index in blue), bonds (represented by the Barclay’s U.S. Aggregate Bond Index in grey), and the S&P 500 (in orange).
With the sole exception of the 20-year time frame, REITs are performing in between bonds and the S&P. There’s a reason for that: REITs resemble bonds in that their value comes from what is essentially a kind of fixed income, in the form of leases. The payments from leases constitutes their cash flow – they’re similar to a fixed income vehicle. Similarly, if you buy a bond, the debtor is required to provide a fixed payment on a pre-determined basis to you. In the dataset represented by the chart above, REITs were behaving in between the S&P and an aggregate bond index, because their characteristics sit somewhere between these two asset classes.
In times of economic turmoil and panic, investors are looking for sources of yield.
Next time, we’ll directly compare the yields that bonds are currently offering to the yields offered by REITs.
* Source: “Visualizing the 700-Year Fall of Interest Rates,” February 2020, VisualCapitalist.com
** Source: “Fed Slashes Rates to Shield Economy From Pandemic,” March 2020, Statista.com
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.