Yield matters. Not that you’d necessarily know it from where some markets are trading.
For instance, at one point last week, U.S. short-dated Treasury bills were said to have had a negative yield. That’s to say, investors were paying the U.S. government to hold its paper.
And 10-year U.S. Treasury notes are yielding just over 3.3% — exactly the average U.S. inflation rate of the past century. In other words, the expected real return of longish-dated U.S. government paper is broadly the actual return of short-dated U.S. government paper. Which is nothing.
Investors have lately been chasing gold, which is another asset with a negative yield (no earnings, but you’ve got to pay to store the stuff).
OK, so there’s a bit on offer from equities. The S&P 500 index returns 2.4%. That’s a little more than a percentage point more than equities returned during the peak of the tech and telecom bubble. Yipee. But then again, share buybacks also returned about another percentage point back then, and you don’t hear of too many firms spending their recently hard-accumulated cash on something as silly as shares, do you? So the actual percentage payout to shareholders probably isn’t so different from where it was in the craziest of the go-go days. Not so yipee.
You get a little more return from corporate credit, particularly high-yielding paper, and from emerging markets, but even here the spreads have narrowed considerably since the spring. On the other hand, you could also argue that the additional bits of yield are hardly compensation for historic volatility — never mind the market gyrations of the past couple of years.
Indeed, that’s why yield matters. In a world where wildly fluctuating capital values are the norm, investors would do well to look for a safe source of income. Throw in the risk that trend growth will be considerably lower than it has been in this brave new world of massive government, heavy regulation, deleveraging and general consumer uncertainty and the potential sources of that income shrink.
Bill Gross, head of the giant bond fund Pimco, and Warren Buffett of Berkshire Hathaway have identified utilities as the best source of that guaranteed flow. They yield two to three times more than the overall market index. And if the upside is strictly limited by regulators, it’s also true their returns are as guaranteed as anything in these crazy markets.
Yield matters. And so does the source of that yield.