A lot has to go wrong to justify today’s rock-bottom bond yields
When Japan slid into deflation in the mid-1990s bond investors were caught unawares. As late as 1995 yields on government bonds, a haven in times of deflation, were still approaching 5%. Investors today are not about to repeat that mistake. Inflation may be positive in America, Britain and Germany, but in all three countries government-bond yields have plunged to lows exceeded in recent times only by levels during the 2008 panic.
Since falling yields raise the value of bond principal, that has delivered bumper returns to investors. Government bonds have returned about 8% this year in local-currency terms in these three countries, according to Barclays Capital, outpacing equity returns. (Investors in weaker sovereign credits, such as Greece, have fared far worse). As go returns, so go investors. American equity mutual funds have seen net outflows this year of $7 billion, according to the Investment Company Institute, a trade group. Bond funds have had inflows of $191 billion. …
Why not invest in Treasury Inflation-Protected Securities (TIPS) instead? These provide protection from inflation but not against increases in real interest rates. Real rates (nominal rates minus inflation) might be pushed up by increased government borrowing or reluctance by Chinese investors to send us money to buy bonds.
Related Information in Prosperity News
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- Debt, Equity and QE2 – Bond Purchases May Have Helped
- Economics focus: A winding path to inflation
- Where the Professionals Think You Need to Invest in the 2010’s
- Money and Wealth: Investing Strategies You Need Now
