It’s Hard to be a Yield Hog

Matt Wright, CFA® |

While the U.S. 10-year Treasury yield had been as high as 3.2% just last November, it has recently fallen below 2% on expectations of slower economic growth. While sub-2% yields have not been unusual in the low-interest rate environment we’ve been in following the 2008 Global Financial Crisis, it is without a doubt much lower than we’ve experienced in prior decades.


If you think U.S. yields feel paltry, consider this: The Republic of Austria issued a 100-year bond in 20171 with a 2.1% yield-to-maturity! It might seem crazy for investors to lock up their money for so long with such little potential return, but when you consider that there are trillions of dollars in the world (much of it in Europe) with negative yields, maybe it looks somewhat rational.


The early buyers of those Austrian bonds have been rewarded so far. Interest rates have declined since issuance in 2017, causing the bond’s price to appreciate over 50%! Austria took advantage of this and just re-issued more of the bonds (now with 98 years remaining) with a slim 1.17% yield!


The point in telling you this is that financial markets change over time, and you can’t rely solely on past levels of interest rates or stock valuations to tell you what will happen in the future. Low rates are particularly problematic for investors who emphasize yield in building an investment portfolio. Their goal is typically to buy stocks and bonds to produce a high income stream and theoretically reduce the need to withdraw from the principal.


The trouble today is, with yields relatively low across much of the globe’s investment options, the only reliable way to get more yield is to take more risk. Thus, an investor may end up with an assortment of securities that offer a pleasant yield today but are likely to see stock dividend cuts and bond defaults over time as some of the companies will prove unable to meet their obligations. The overall portfolio’s yield may start to decline, causing the investor to take on even more risk in an effort to raise it back up. This can lead to a dangerous cycle of escalating risk and often concentrating on a small group of industries that may not end well.


Our view is that a portfolio need not be designed for yield. Instead, our emphasis is on creating a globally diversified portfolio to provide a tax-efficient cash flow stream from income and principal over time.


If you’ve been reaching for yield and finding it hard to do, contact SWA today for a complimentary review of your portfolio.


1 Forsyth, Randall W. “Global Bond Markets Are So Crazy Right Now That Even 100-Year Bonds Are Selling”. Barron’s, June 28, 2019.