It’s tough enough for fixed-income investors — retirees, life-insurance companies, pension funds — to find high-yielding assets, with the Federal Reserve holding rates so low. It’ll get even tougher when negative yields comes to the U.S., according to one prominent investor.
Scott Minerd, chief investment officer at Guggenheim Investments, predicts that the yield on 10-year Treasury notes — currently around 0.82% — could flip to negative 0.5% by 2022. That could trigger a ripple effect that would eventually cause the Fed to assume risk, Minerd told Yahoo Finance Live.
Fed officials embarked on a listening tour over the past couple of years to gather not just data, but anecdotal evidence from their constituents. “The clients who I have who are insurance companies, who are pension funds, made the case to them that their policies were basically destroying their business,” Minerd said. But he said the Fed didn’t see it as an urgent issue, focused on its dual mandate of price stability and full employment.
Indeed, the Fed is pumping liquidity into a financial system stressed by the coronavirus pandemic, and Fed Chair Jerome Powell said this week that the central bank is poised to help further if necessary.
Central banks around the globe are equally, if not more accommodative — which means there’s already plenty of negative-yielding debt. In fact, the amount of debt with negative yields reached a record high this week, with the the market value of the Bloomberg Barclays Global Negative Yielding Debt Index rising to $17.05 trillion.
Low- or negative-yielding debt has tended to push investors into higher-yielding — but riskier — assets. That’s one reason that many strategists cite when explaining the resilience of stocks.
When yields go negative in the U.S., it is “going to raise questions about the stability of the financial system, but the Federal Reserve and policymakers have basically been willing to socialize a lot of risks with the corporate bond purchase program,” Minerd said. “So as time goes on, it will just force the policymakers into socializing more of these problems and making it the burden of the U.S. government.”
That could dredge up a debate that reared its head during the Great Financial Crisis, the idea being that financial firms will take more risk if they think the government will bail them out.
Julie Hyman is the co-anchor of Yahoo Finance Live, 9am-11am ET.