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.
COVID-19 Economy FAQs
How many people are flying? Has traveled picked up?
Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.
How are Americans feeling about their finances?
Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.
Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.
What’s going to happen to retailers, especially with the holiday shopping season approaching?
A report out recently from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.