No Place for Orphans & Widows
By Julien B. Booth
July 27, 2021
I hope this note finds you enjoying the summer heat.
Once upon a time, fixed income and real assets investing was an intentionally boring, yet very large asset class(es) that was wonderful at generating income and providing safety for conservative and retired investors, pension plans, widows, orphans et. al.
Post 2008 crash + Covid Crash, and now Federal Reserve buying much of the US Treasury debt (yes, it’s largely a circular $ creation exercise), the ability to earn a real return on your savings has never been more difficult. At the time of this note, the 10 Year US Treasury bond yields a mere 1.27% per year, investment grade bonds 1.8%, and pure junk bonds 3.6%.
Inflation is 4-5% per annum by any measure, but far greater if you prefer to maintain your standard of living.
The chart below provides some color on the state of fixed income markets. Real yields are after the effect of inflation.
Even stocks now have negative real yields.
The reality of this condition is stark. How does one fund a long term liability (retirement or otherwise) on such meager interest rates?
Net, net, you cannot. The dilemma facing investors is to reduce consumption, increase risk appetite (creating material principle risk) or accelerate ones demise (least preferable). Institutions are in the same boat – imagine the horror of the pension managers who in aggregate project broad rates of return @ 7.5%+. They “assume” 3.5% for their fixed income yields. Even Junk bonds do not meet this hurdle.
The underlying income strategies we employ are/were designed for 5-7% portfolio yields over the cycle. We are clinging to the preferred, bond and income securities we purchased over the past several years (many at yields of 6%+) and spending tremendous time trying to find value/safety amongst what remains.
Diligence and good trader relationships are an absolute necessity.
Opportunities will return with patience, but we are loathe to chase risk assets with far less fundamental underpinning (i.e. stocks at 100% of historic valuations etc.).
Chasing assets for lack of other options is seldom rewarded. We are truly seeing some absurd behavior today.
Time is the great arbiter of so many things. We are confident opportunity will return as we get further along in 2021 and the effects of stimulus funds, foreclosure moratoriums, and other extraordinary measures wane. There is no lack of drama in the financial markets.
Cheers,
JBB
Chief Investment Officer – Fixed Income & Real Assets
BRC Wealth Management