Negative-Yielding Treasuries?

The Federal Reserve has pledged not to take interest rates into negative territory - which actually has sobering implications for the market for treasury bonds. Today, Wealth Daily contributor Samuel Taube discusses why the zero lower bound could be the end of the bonds’ status as a safe haven investment. [Wealth Daily logo] Negative-Yielding Treasuries? [Samuel Taube Photo] By [Samuel Taube]( Written Jun 21, 2020 In a mid-May video conference with the Peterson Institute for International Economics, Federal Reserve Chairman Jerome Powell succinctly vetoed an idea that had been weighing on the minds of treasury bond traders for years. “The committee's view on negative rates has not changed. This is not something we're looking at,” he told the audience. Even though the U.S. economy is struggling through a severe recession during an extended period of abnormally low-interest rates, the Fed refuses to take its benchmark interest rate into negative territory, fearing that below-zero rates could upend the money market. While this position might sound reassuring, it actually has sobering implications for the markets long-term treasury bonds, which has seen four decades of almost continuous growth because of falling yields. The 40 Year Bull Market in Long-Term Treasury Bonds Long-term treasury bonds have been a fantastic investment for most of the last half-century — largely because their prices are negatively correlated with U.S. stocks. In fact, since the beginning of 2018, the iShares 20+ Year Treasury Bond ETF (NYSE: TLT) has outperformed the S&P 500. [treasury bonds, safe haven, 1] Due to the nature of bond markets, the 40-year-long bull market in long-term treasuries has also brought a 40-year-long decline in the interest rates on these bonds. The 30-year Treasury yield hit a high of 15% in 1981, but today it’s consistently below 2%. How did it drop so low? The simple answer is that the bond market made it so. A bond’s yield is simply a conceptual ratio equal to its annual dollar payout — which is fixed — divided by its market price. As traders bid up the price of a bond, its yield falls since its payout doesn’t change. And for the last 40 years, traders have bid up the price of long-term treasury bonds on a near-consistent basis, leading to steadily falling yields. But there’s a bit more to this market behavior than meets the eye. As you can see in the graph below, the market yield of 30-year Treasuries has strongly correlated with the Federal Reserve’s benchmark interest rate, which has also fallen from historic highs in the early '80s to historic lows today. [treasury bonds, safe haven, 2] That’s because the rate on long-term treasury bonds and the benchmark interest rate — also called the federal funds rate — both fundamentally measure the same thing: the lowest possible cost of borrowing money in America. Sure, they represent different kinds of loans and different maturities; the Fed’s rate is for interbank overnight lending while the 30-year treasury bond rate measures the cost of long-term government debt. The former is calculated by technocrats in a boardroom while the latter is calculated spontaneously by the whims of the bond market. But ultimately, the two rates both represent the lowest possible cost of capital in the economy. The bond traders who determine long-term treasury bond rates tend to look to the central bank technocrats who determine the federal funds rate for guidance. And with that in mind, Chairman Powell’s “this is not something we’re looking at” remark is not nearly as calming as it might sound… 5G Is Monopoly-Free Companies around the globe are racing to dominate 5G by building towers and networks. But one thing’s clear... 5G is still under the radar. Many countries have barely begun thinking about it. And those investors that get in early will be the big winners. The U.S. will be completely 5G compliant by 2020. That’s right — only a couple months away. In fact, cybersecurity titan Cisco runs a program that helps countries “digitize” faster. Cisco understands that at the end of the day, 5G will only work if there’s global acceptance and capability. Guy Diedrich, Cisco’s vice president and global innovation officer, said it best: There is not any one country, one company or one continent that’s going to own 5G... I engage with those 31 countries around the world... and it’s going to take a large number of those partners to see 5G fulfilled. Industries ranging from health care to manufacturing and many more can’t wait to upgrade their systems with 5G. That’s how game-changing 5G is. Investment expert Jason Stutman has found three stocks that could skyrocket with the growing 5G market. This is your chance to still get in on the 5G revolution early. [Click here to find out the three stocks to buy now!]( Why “No Negative Rates” Isn’t As Reassuring As It Sounds Given that the bond market tends to follow the Fed in setting yields, Powell is effectively putting a ceiling on the price of treasury bonds. After all, the federal funds rate is the interest rate for overnight loans. If the Fed won’t allow it to dip below zero, then it’s effectively also disallowing longer-term debt from trading at negative yields — lest it freaks out global financial markets by [permanently inverting the yield curve](. (Markets generally expect interest rates on longer-term debt to be higher than those on shorter-term debt and they see a deviation from this pattern to be a sign of an upcoming recession.) If the Fed maintains a zero lower bound in its interest rate policy, it will effectively be telling the bond market that treasury bonds have no more room to rise. So, what should you buy instead? 5G Is Monopoly-Free Companies around the globe are racing to dominate 5G by building towers and networks. But one thing’s clear... 5G is still under the radar. Many countries have barely begun thinking about it. And those investors that get in early will be the big winners. The U.S. will be completely 5G compliant by 2020. That’s right — only a couple months away. In fact, cybersecurity titan Cisco runs a program that helps countries “digitize” faster. Cisco understands that at the end of the day, 5G will only work if there’s global acceptance and capability. Guy Diedrich, Cisco’s vice president and global innovation officer, said it best: There is not any one country, one company or one continent that’s going to own 5G... I engage with those 31 countries around the world... and it’s going to take a large number of those partners to see 5G fulfilled. Industries ranging from health care to manufacturing and many more can’t wait to upgrade their systems with 5G. That’s how game-changing 5G is. Investment expert Jason Stutman has found three stocks that could skyrocket with the growing 5G market. This is your chance to still get in on the 5G revolution early. [Click here to find out the three stocks to buy now!]( Where To Go After Treasury Bonds Investors have several options to replace treasury bonds as their prices approach the ceiling imposed by the Fed’s zero lower bound in interest rates. Investment-grade corporate bond yields still have some room to fall before reaching near-zero territory. This implies that corporates could replace treasury bonds for fixed-income investors who still want capital gains from their bonds. [treasury bonds, safe haven, 3] Other commentators have suggested that treasury bond investors should shift some of their holdings into gold, noting that the yellow metal is another asset in which price is not positively correlated with the stock market. But income investors who are looking for guidance during these strange times are best off consulting experts, like Briton Ryle and Jason Williams of [The Wealth Advisory](. Their investment recommendations have provided a steady stream of dividends to their subscribers, even during the recent recession. [Click here](, to learn more. Until next time, [Monica Savaglia] Samuel Taube Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to [Wealth Daily](. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, [click here](. Enjoy reading this article? [Click here]( to like it and receive similar articles to read! Browse Our Archives [New Jersey to Invest Millions in California Retirement Program]( [The Best Indicator of a Top I’ve Ever Seen]( [How Risky Is Facial Recognition?]( [Here Comes the Second Wave]( [How the Racial Wealth Gap Makes Us All Poorer]( --------------------------------------------------------------- This email was sent to {EMAIL}. It is not our intention to send email to anyone who doesn't want it. If you're not sure why you've received this e-letter, or no longer wish to receive it, you may [unsubscribe here](, and view our privacy policy and information on how to manage your subscription. To ensure that you receive future issues of Wealth Daily, please add newsletter@wealthdaily.com to your address book or whitelist within your spam settings. For customer service questions or issues, please contact us for assistance. [Wealth Daily](, Copyright © 2020, [Angel Publishing LLC](. All rights reserved. 3 E Read Street Baltimore, MD 21202. The content of this site may not be redistributed without the express written consent of Angel Publishing. Individual editorials, articles and essays appearing on this site may be republished, but only with full attribution of both the author and Wealth Daily as well as a link to www.wealthdaily.com. Your privacy is important to us -- we will never rent or sell your e-mail or personal information. [View our privacy policy here.]( No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. [Wealth Daily]( does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. ---------------------------------------------------------------