No Safety in Numbers

When are sovereign bonds no longer safe?

Global Yield Curves, 10-28-16. Source: Bloomberg

For decades people have invested in stocks for growth and in bonds for safety. But the global financial crisis and its economic aftermath have changed that. Now sovereign bonds around the world have extremely low yields. 30-year bonds in the US yield just over 2.5%, and that’s the highest yield anywhere. You can get higher yields in emerging markets, but those come with currency, credit, and inflation risk.

There have been two prior periods with low nominal bond yields like this one: the 1890s and the 1930s. Both were times of restrained economic growth following a financial crisis. Both were also periods of populist sentiment and public hostility to bankers. “Burn down your cities,” William Jennings Bryan intoned, “and they will spring up again; but destroy our farms and the grass will grow in the streets of every city in the country.”

To be sure, today’s economy differs significantly from that of the ‘30s or 1890s: the service sector is much larger, the government plays a much bigger role, and monetary policy is more flexible—we’re no longer on a gold standard. Also, the economy is more diversified. But the decline in nominal yields is striking: after the prior two crises, yields remained depressed for at least 20 years.

Source: Credit Suisse

For investors, this is important. A prolonged period of very low rates means that traditional asset allocation models won’t work the way they used to. Robo-advisors and passive strategies may be well-intentioned, but they’re not the solution in a sustained low-yield environment.

Times change, and investors need to change with them. If we want to reach our financial goals, we’ll need to be more creative.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:38+00:00 October 28th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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