11.7 Trillion Reasons Why the Yield Chase is Out of Control

Mike Larson | Friday, July 1, 2016 at 7:30 am

Why is yield chasing so out-of-control these days? I’ll give you 11.7 trillion very good reasons!

That number represents the dollar value of sovereign bonds globally that are now yielding less than 0%. Not only is that a mind-bogglingly high figure, it’s up a staggering $1.3 trillion just since May, according to new research from Fitch Ratings.

Long-term bonds make up an increasing percentage of the NIRP pie, too. The dollar value of negative-yield bonds with maturities at least seven years from now has surged 86% in only two months. In Switzerland, you can’t find a positive yield unless you buy a bond maturing almost a half-century in the future. Then in the wake of an announcement by Bank of England Governor Mark Carney that his central bank may cut rates further, do more QE, or otherwise loosen policy, yields on a handful of U.K. bonds slipped into negative territory for the first time ever.

The result? Investors are engaged in the most-heated yield chase in world history. They’re buying utilities. They’re buying consumer staples. They’re buying telecommunications names. They’re buying bond funds, bond ETFs, even zero-coupon Treasuries.

Investors are engaged in the most-heated yield chase in world history.

They’re even buying gold as a “yield” play. After all, the 0% interest rate on a gold bar beats the negative-0.12% you “earn” on a German 10-year Note, or the negative-0.31% you “earn” on a Japanese 2-year Note, to cite just a few examples.

You never hear about it on CNBC – but the result is that ultra-safe government bonds are absolutely trouncing stocks. Not only that, but safer, more reliable, higher-dividend, lower-volatility, non-economically sensitive stocks are absolutely beating the pants off the supposedly “sexy” names that the talking heads like to trot out on TV.

Alphabet (GOOGL)? It’s down about 10% year-to-date, while Netflix (NFLX) is off 20%. Widely held banks like JPMorgan Chase (JPM) and Bank of America (BAC) are down 7% and 22%, respectively. Microsoft (MSFT)? It has lost you almost 9% so far in 2016, while Apple (AAPL) has cost you 10%.

What about popular transportation stocks, like FedEx (FDX) or Delta Air Lines (DAL)? A gain of less than 1% … and a loss of 28%. Widely held industrials like General Electric (GE) or General Motors (GM)? Try minus-2% and minus-17%. Even those names every tech guru likes to gossip about — Facebook (FB) and Amazon.com (AMZN) — are only up 6% and 9% this year.

By comparison, the Vanguard Extended Duration Treasury ETF (EDV) is up 23% in the first half of 2016. The SPDR Gold Shares (GLD) is up 24%. The iShares US Telecommunications ETF (IYZ) has risen more than 14%, while the Utilities Select Sector SPDR Fund (XLU) has gained 20%.

Why do I keep hammering this point home? Because few pundits seem to want to champion “Safe Money”/”Safe Yield” investing. They all want to talk about the next whiz-bang tech stock or high-risk IPO, as if those investments were actually working well.

My advice? Focus on what’s working (safe dividend stocks) … and on why it’s working (the lousy economy, never-ending NIRP/ZIRP policy, demographics, and more) unless and until conditions change. And for more specific names, “Buy” and “Sell” recommendations, and so on, be sure to check out my Safe Money Report.

Until next time,
Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.