...savers who have stocked up on bonds with record low yields face danger on two fronts: on the one hand, their income could be eroded by inflation, while on the other, the value of their holdings could fall sharply when interest rates do start to rise.
Arthur Steinmetz, chief investment officer for Oppenheimer Funds says he wants to send a blunt message to investors who are flocking to buy bonds with meagre yields.
“People, out of fear, are getting poor slowly. I’d like to dump a bucket of cold water on these people and say ‘think about it! Consider the consequences of your choice’.”
Across the developed world investors are willing to accept low income in return for the perceived safety of portfolios anchored primarily in government paper and other bonds that will return their principal. However, the yield on the benchmark 10-year US Treasury is below the rate of inflation, and there are negative real yields in Germany and the UK, too.
“Investors are still worried by the volatility roller coaster they see in the equity market,” says Andrew Lo, professor at the Massachusetts Institute of Technology. “Investors, and in particular retirees, feel they have little choice but to go into bonds.”
What is missing, argues Seth Masters, chief investment officer for asset allocation at AllianceBernstein, is a long-term perspective. He says short-term thinking and fear has inflated a “safety bubble” pushing up the price of assets across the fixed income markets while boosting supposedly low-risk dividend stocks, as well.
He likens it to the dotcom bubble more than a decade ago but says it will be more painful when it bursts this time because of investors’ belief that bonds are safe.