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Where Has All The Yield Gone?
The picture above at first glance may be difficult to initially discern what exactly is going on and if were blogging about abstract art. It is not the latter but is a fascinating chart on historic global bond yields, and something that is very relevant to today’s retirees. What that picture is showing, is global bond yields by bucket from 1997 – today. By bucket we mean categorizing the percentage of outstanding bonds across the world that yield say, 4% – 5%. That would be illustrated by the color orange in this chart. You can see over time, what percentage of the worlds global bond supply had a yield between 4% and 5%. You can see the rest of the categorized buckets by looking at the right side.
Why is this important to you? Well, if you look at this long enough you will notice the closer you move towards today, the larger the percentage of the worlds bonds that are paying lower rates. The orange component (4% – 5%) bonds has gotten smaller over time. In fact, at the bottom right hand of the graph you see the emergence of dark blue. Those are bonds that pay LESS than 0% in yield. Negative yielding bonds. Which means, yes, that when you buy it and it matures at a later date you will receive less than invested. So, the trend is that bonds are paying lower interest, and we even have a new odd sort of bond that we actually pay to own. For retirees, this has implications. Many retirement spending models use historical yields and investment performance to project spending plans over the next few years. I’m not saying that yields won’t pick up over the next decade or two, but it is quite clear on this chart that nearly 80% of global bonds pay less than 3% interest. If you are taking out 4% a year, a portfolio of 100% bonds puts you on a depletion strategy. That wasn’t necessarily the case 20 years ago.
Today’s retirees will face a potentially greater challenge than generations before them in sustaining portfolio values over the years they are taking withdrawals. Bond yields today are significantly lower and may offer a lower total rate of return over the next several years. We try to employ a total return strategy that not only uses bonds but stocks and alternative asset classes as well. In our fixed income allocation, we believe it is crucial to utilize managers that understand this dynamic and can find opportunities for additional yield and risk management. The good news is that the bond market is nearly $30 trillion dollars in size, so $6 trillion in bonds still yields north of 3%. There is opportunity if you employ the appropriate strategy. If you have questions on how this is currently impacting your portfolio, or what to expect in your retirement strategy, give us a call. We can help you examine what you are doing, and what you may need to improve moving forward.
This commentary written and edited by Robert Jeter, CFP ®, CRPC® and Eric Johnston, CFP®, AIF® of InFocus Financial Advisors, Inc.
The views are those of Robert Jeter and Eric Johnston and should not be construed as specific investment advice. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.