At the Financial Times, John Dizard explains how Fed policy is leaving retirees broke. He writes:
At the present trajectory of Fed policy, the 10-year bond will be close to yielding zero per cent by election day in November. The Fed will be trying to defend the “zero lower bound”, a set of points on a yield curve just above negative interest rates, for short-term funding. But by the time the 10-year rate gets within 10 or 20 basis points of the ZLB, the curve is telling you that there is no reward for saving money for the long term.
At that point, which by simple extrapolation comes in three months or so, fixed income investors will frantically chase yield from anywhere available. That is already happening.
The Bank of America/ICE CCC index of yields on bonds one step away from default has rallied from 19.03 per cent on March 23 to 12.55 per cent on August 3. At the same time, actual defaults are rising fast. According to Fitch, 5.5 per cent of junk bonds defaulted in the year up to the end of July.
By the end of next year, the defaults will accumulate to higher than the yield on CCC junk. The courts are so backed up by covid-related closings and slowed procedures that reported defaults and filings are far behind the reality. So extreme yield chasing will end badly.
This is about desperation, not high spirits.
David Rosenberg of Rosenberg Research in Toronto says: “As the boomers head into retirement age, what do they need? Income. What has this Fed strategy done? It has stripped the markets of income and forced investors into growth stocks. Those are long duration stocks. Retirees don’t need duration. They need cash flow.”
For the moment, the capital gains in US pension and retirement accounts created by yield chasing have masked the shortage of cash flow signalled by the curve flattening. But the impoverishing of retirees will take on a new form as currency debasement whittles away the purchasing power of the tiny yields they have bought. Or so the gold price says.
Read more here.