Last week Fed Chair Janet Yellen decided, in the face of non-crisis level U.S. economic statistics, to leave interest rates unchanged at the economic crisis level of 0%!
Her rationale was believable for some and hard to understand for others but, for anyone who listened and for those who didn’t, she mentioned non-U.S. economic factors as well as a fear that the economy here might lose whatever traction that it has (Janet Yellen – Analogy To A Timid Equity Trader!).
The net result was global market concern that perhaps there was more to this economic story than what was being told to us by the Fed Chair.
This concern was expressed by the markets with a stock sell-off on Friday, a low volume rally on Monday, and an emphatic resumption of the selling at least on Tuesday morning.
So if many European and the Chinese economies are indeed as weak as they appear to be, are the current 10-year sovereign debt yields for many countries sustainable?
In other words if global governments are facing continued financial angst that’s now compounded by the cost of potentially tens of thousands of refugees, should the sovereign yields for many be so far below the levels that they were in 2012?
For bond buyers this becomes a critical question because Bonds 101 will tell you that as yields rise prices will fall.
A look back at historical bond yields…
Fast forward to April 2014 and these were the 10-year yields for the following sovereign debt:
United States 2.69%
And what are these yields today when economies seem to be in worse shape and governments are saddled with increased expenses at an unknown level?
United States 2.17%
With the exception of Greece that recently reelected a socialist to run the country, 10-year yields for these other countries are all below 2014 levels and for the PIGGS well below 2012 crisis levels.
And while the debt of some countries will enjoy a flight to quality during periods of crisis (i.e. U.S. and Germany), if the market were truly efficient other weaker countries should experience the opposite.
So the question is whether we are out of the economic woods as some of these bond yields would suggest or, has global QE forced investors out onto the risk spectrum seeking yield?
If the latter is the case then the potential for significant fixed income losses is most definitely a concern!
The end result?
In the United States continued low rates will hurt savers and retirees, conservative investors may take on excessive risk and borrowers (if they qualify for a loan), will benefit.
The low rate scenario should also continue to benefit real estate, unless of course consumer confidence starts to erode.
Article from Michael Haltman, President of Hallmark Abstract Service in New York.Google+