Where in the World is the Yield?

Excerpt from our October 2021 Newsletter

Before the year 2000, it was reasonable to expect a safe 6% interest rate (or “yield”) on your savings. There were multiple guaranteed options such as government bonds, CDs, and fixed annuities. Even as recently as 2007, interest rates were still reliably above 4%.

The 2008 Financial Crisis changed all of this. I have a piercing memory of an older woman from the WWII generation who was nearly in tears because rates had fallen to a third of what she was used to. Needless to say, at her age, she was not comfortable with increasing her risk in pursuit of more yield.

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Yields have continued to decline since then and the pandemic has only made it worse. Right now, the shortest term interest rates are essentially zero. So it’s hard to imagine why anyone would lock up their money for any period of time in order to earn 0%.

The strange thing is that 0% is not the bottom. Rates can actually be negative. A negative interest rate means that you are essentially paying the government to hold onto your money for you. Our guess is that unless inflation becomes a problem, interest rates will go negative on US government bonds within five years.

What may surprise many people is that relative to our peers in the world, we are actually unusual in that we haven’t experienced this yet. In most of Europe as well as Japan, short term government bonds have a negative yield on them.

You may rightly wonder why anybody would buy these bonds, yet globally $13 trillion dollars are held in bonds with negative yields. In most places in the world, the yields are negative for bonds shorter than five years. On the extreme end of this, if you bought a 15 year government bond in Switzerland, the rate would be -0.05%. The United States and The United Kingdom are the only ones in the group with positive yields across the board. Here is a table of the yields of some of our peer countries:

The reason for this is complicated, but it’s important to see the other side of the inflation coin. We are lucky that we have some inflation because not having inflation creates problems in other areas of the economy – problems that are much harder to mitigate.

To be clear, we are not overtly worried about this. Should it happen here, the usual suspects will report it as the end of the world. It’s a problem, but nothing our peers in the world haven’t been able to manage for many years.