When will the bond markets stop giving away cheap money to borrowers of all stripes? I don't see that happening anytime soon.
It's a ridiculous time in human history, at least modern history, to be an income investor. The search for yield is often a fruitless one, as the incredible 2019 sovereign debt rally just keeps on truckin' with no end in sight. I certainly can't see one, anyway.
The issue, of course, is that those sovereign bonds are the benchmark for the pricing of virtually every other fixed-income security on the planet. It's a one-way trade, and, boy, has it been a good one. The bond market does not have a single-source indicator like the S&P 500, but looking at a variety of indexes, it is obvious that 2019 has been a terrific year. I started out at Lehman Brothers, on the equity side, so I guess that makes me partial to the old Lehman Brothers -- now Barclays (BCS) -- Aggregate Bond Indexes.
The performance for these indexes has been nothing short of terrific for the past 12 months. Here are the one-year returns for selected Barclays indexes, presented in hedged dollar terms:
Global Aggregate: 11.07%
Global Corporate: 12.34%
Global Treasury: 11.68%
Global High-Yield: 7.61%
I follow those particular sub-indexes to follow the performance of the credits without the benefit/hindrance of currency. If you wanted to avoid currency risk altogether and stay here at home, though, the U.S.-based Barclays indexes have delivered terrific one-year returns, as well.
U.S. Aggregate: 10.68%
U.S. Corporate: 10.97%
U.S. Treasury: 13.91%
U.S. High-Yield: 6.42%
In contrast, the S&P 500 has posted a meager 1.28% price appreciation, plus about 2% from dividends in the past 12 months. The "bad" months -- October, December, May and August -- have been almost enough to erase the U.S. stock market's gains for the year, but the bond market seemingly has no bad months. Can that continue?
I think it can, and you would have to pry any bond or preferred in my or my clients' accounts out of my cold, dead hands. The issue is that every one of the securities we own pays interest or dividends, plus there are occasional maturities. So, there are always funds to reinvest, especially since having fixed-income securities called away is a very real risk now that rates are so low.
According to the Financial Times, the average yield in a broad index of investment-grade bonds calculated by ICE Data Services (ICE) fell in August from 3.21% at the start of the month to 2.87% by the end. Currently there is no U.S. Treasury bond yielding more than 2%, and there aren't any sovereign bonds anywhere else in the developed world yielding more than 2%, either.
It is seemingly impossible to find 3% yields anywhere. At the risk of using overly technical language...3% is not a lot.
Those of us who have been at this game for a long time realize that for most of modern history a 3-month U.S. Treasury bill yielded more than 3%. That yield didn't sustainably fall below 3% until after Sept. 11, 2001, and then after recovering didn't cross that threshold again until January 2008, which should have been a huge "tell" to the equity markets.
Now 3% seems almost like a bridge too far. But it is not. There are sane -- and not overly risky -- ways that you can lock in safe yields well in excess of 3% now. Where are they? I'll explain in another Real Money column.