Markets: Low bond yields wreak havoc on savers
Years of low interest rates have forced investors to get used to paltry returns on bonds and savings accounts, said Liz McCormick in Bloomberg Businessweek. The average savings account now pays 0.10 percent interest, down from 1.73 percent way back in 2000. The 30-year Treasury bond, a favored safe security for long-term savers, “yields about 2.5 percent—compared with an average 6.5 percent since the 1970s.” With this week’s Federal Reserve interest rate cut and the prospect of more reductions to come, returns could dip further. The effect on savers has been dramatic and sometimes devastating. Institutional investors have been hard-hit, too. Pension funds “have been ratcheting down return expectations”; the California Public Employees’ Retirement System recently revised its expected 10-year return to 6.1 percent from a previous target of 7 percent. Wall Street’s bond experts warn that slow growth and a worldwide glut of savings have made low returns on bonds the “new normal”—and that “yields can absolutely go a lot lower.”
“We haven’t seen interest rates this low since before Hammurabi,” said Howard Gold in MarketWatch.com. No, really: Richard Sylla, an expert in bonds at NYU’s Stern School of Business, confirms that some bonds now offer the lowest returns in recorded history, back to ancient Babylon. Many European short-term government and corporate bonds actually have negative yields, meaning that bond holders are paying to lend money; investors get those bonds because they see few other safe places to park their cash. Amid this bleak outlook there are still some alternatives to the stock market, said Jeff Reeves, also in MarketWatch.com. “Junk” bond funds that invest in corporate bonds with “less-than-stellar credit ratings” can offer substantial returns. Another option for investors looking for regular income: Real Estate Investment Trusts. An REIT “must deliver 90 percent of taxable income back to shareholders, giving it a mandate for big dividends.” The performance of REITs can be volatile, so if you invest in them, it’s safest to choose a fund with a diversified REIT portfolio.
Investors looking for better yields than they can get from bonds should also consider the “bond proxies”—utilities, consumer staples, real estate, and telecom—said Daren Fonda in Barrons.com. These stocks may not have the best returns in a roaring economy, and you should be warned that “these sectors will likely underperform if the economy reaccelerates.” But they are well positioned to weather a market decline. Within those categories, Goldman Sachs analyst Ben Snider likes real estate and telecom. One other kind of insurance: companies that have underperformed the market “without a corresponding decline in earnings estimates,” such as Altria and Verizon. Their stable cash flows may be well insulated from a downturn. ■