10-year Treasury yields, at record lows, are still above zero. Not after inflation, though.
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The yield is the annual interest rate a bond pays for the benchmark 10-year Treasury note. Friday, it was a stunningly low at 0.77% at the close — and that wasn’t even the intra-day low. But hey, at least it’s still positive, right?
Well, no. Because of inflation, “real yields” have gone negative. When you factor inflation, investors are actually losing money by lending to the U.S. government. The “real” yield on the 10-year-note is about negative 0.5%. Why would anybody do that?
“People are willing to pay up for that safety,” said Karissa McDonough, chief fixed income strategist with People’s United Advisors. “They’re effectively giving up future sources of real yield to park their money to be safe today.”
This has happened here before, during the European debt crisis in 2012 and 13. Robin Brooks, chief economist at the Institute of International Finance, an industry trade group, said investors are anticipating the Fed will likely need to cut rates even further to cushion the blow from COVID-19.
“If real rates are negative the way that they are now, it’s sort of a realization that ‘Holy cow, perhaps the Fed will be at zero for a very long time,'” Brooks said.
The fear that’s driving investors into bonds could slow growth even more.
“That means that money that would have flowed into financing projects, or money that would have gone into investments, it’s currently hiding in treasuries,” Brooks said. “That’s harmful for the economy, because basically investment could be weaker and that can hurt growth, going forward.”
Just this week, the Institute of International Finance downgraded its growth forecast for the U.S. from 2% to 1.3% because of the virus.
Marilyn Cohen, CEO of bond portfolio manager Envision Capital Management, said while some investors stick to safety, she worries others will start chasing higher yields.
“You can buy dividend-paying stocks or real estate investment trusts,” Cohen said. “Well, those are very different instruments as your bond surrogate. They act very differently. Yes, their yields are higher than bonds.”
But, she explained, the risks are higher, too.
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