Diary

Apparently, saving your money is foolish!

From The Wall Street Journal:

By One Measure, U.S. Rates Are Already Negative

Yield on 10-year Treasurys, adjusted for inflation, falls below zero for first time since 2012

By Min Zeng | April 8, 2016 2:02 p.m. ET

Negative interest rates have swept the globe, from Switzerland to Sweden to Japan.

By one measure, they’re here in the U.S. too.

The 2016 rally in government bond prices has taken U.S. real yields, which subtract inflation from the 10-year Treasury yield, below zero for the first time since 2012.

The 10-year U.S. Treasury yield was recently 1.72%, which is below the latest reading on the core consumer-price index of 2.3%. By this metric, the real U.S. 10-year yield is -0.58%.

Inflation is the main threat to bondholders. Many look at real yields because they reflect the real purchasing powers investors obtain from investing in fixed-income assets. The fact that investors are willing to buy the 10-year note without enough compensation for an uptick in consumer prices has been confounding many analysts. Some are concerned that this leaves the bond market vulnerable to jolts if sentiment sours. . . . .

Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia, expects the 10-year nominal yield to fall to its lowest level ever, 1.25%, before 2016 ends, from a recent 1.72%, even if there isn’t another market shock that leads to a retest of the February lows in stocks, riskier bonds and U.S. yields. The previous low, 1.40%, was set at the height of the 2012 euro crisis.

“If things get really bad…the yield will test sub 1%,” he said.

Such a state of affairs would have been unthinkable just a few years ago, when Wall Street analysts routinely predicted a swift return to 5% long-term Treasury yields, let alone in the early 1980s, when yields briefly topped 15% at the height of the U.S. inflation scare.

There’s more at the link.

The Journal article focuses more on investors, but my concern is for workers approaching retirement who have moved into the usual ‘less volatile’ mutual funds in their 401(k) plans. Many 401(k) plans offer less aggressive funds for workers only a few years from retirement, funds which tend to have less upside, but which are also supposed to have less downside risk, and those funds normally carry a higher percentage of their investments in bonds. Workers who bother to check their portfolios frequently — and I check mine daily — will (probably) see a slowly appreciating profit, but once inflation is factored in, the value of their 401(k) plans are actually dropping.

And savings accounts are even worse. Checking the listed savings at PNC Bank, the bank I use, the standard savings account interest rate is a whopping 0.01%. If you have a linked checking account, which I do, it goes up to an astronomical 0.05%. And if you have big bucks in your savings account, $500,000 or more, you can get a ginormous 0.16% interest rate.

We noted previously that the “economic elites” don’t seem to have much of a handle on what people are actually doing with their money, and we commoners just aren’t cooperating. Janet Yellen and the Federal Reserve Board of Governors have had a target inflation rate of 2% for a while now, but have not been able to achieve that. I have to wonder if they won’t get that inflation, as the zero-and-below returns on savings urge more people to spend their money now rather than save it for the future.