“I just want my money to be safe.”
That’s what countless investors have said. But with the Fed buying half of all new Treasury and Mortgage issues, corporate and personal deleveraging, and excess savings coming from the developing world, there seems to be a safety shortage. Indeed, one market analyst has estimated that the global economy is facing a shortage of $1.5 trillion in safe assets, and that this shortage is likely to grow in years ahead.
Increasingly, investors have turned to annuity-like cashflows coming from food companies, drug companies, and utilities in the form of stable and increasing dividends in order to make up for this dearth. But equities—even dividend-paying equities—are not bonds. Going down in the capital structure will have eventual consequences. Ironically, the prices of safe assets—like government bonds and highly-rated corporate debt—have been bid up so high that they are no longer safe.
Like the country singer “looking for love,” investors searching for safety are looking in all the wrong places. Central bankers around the world have repeatedly demonstrated their intention to raise the inflation rate—and central bankers usually get what they want. When inflation and interest rates rise, bond prices will fall.
Douglas R. Tengdin, CFA
Chief Investment Officer