High Yields for a Zero Rate World

Record fiscal and monetary stimulus, pandemic-disrupted supply chains and an upturn in the energy price cycle are stirring global inflation pressures. Consumer prices rose roughly 5 percent in July across the developed world, with the US leading the way.

Most central banks including the US Federal Reserve, however, seem to be in little hurry to tap on the brakes, as they remain more concerned with avoiding deflation and depression. And with pandemic pressures building again in many countries, they’re unlikely to change course at least in the near future.

The ranks of Wall Street professionals who experienced the 1970s and even the 80s shrinks every year. But for anyone who doesn’t remember, that time of volatile stock prices had a saving grace: Exceptionally high cash yields.

As recently as October 1987, you could have bought 30-year Treasury bonds yielding in the neighborhood of 10 percent. Today T-bonds’ return is less than 3 percent and the alternatives pay out even less, including the S&P 500 (1.3 percent). High quality bond funds like Vanguard Intermediate-Term Tax Exempt (VWITX) that I’ve recommended as a cash alternative pay less than 2 percent. And money market funds and savings accounts are lower still.