Where to Get Income in a Low-Yield World

So far in 2020, the yield on the 10-year Treasury has averaged an anemic 0.01 percent when adjusted for inflation. Since the end of January, it’s actually dipped below 0 percent, trading as low as negative 0.14 percent on January 31.

What this means is that investors are guaranteed to lose money on the 10-year T-note if held until maturity.

It’s against this low-yield backdrop that Judy Shelton, one of President Donald Trump’s nominees for the Federal Reserve Board, went before the Senate Banking Committee this week for her confirmation hearing. A former Trump campaign advisor, Shelton is seen as an unconventional pick for the central bank role for two main reasons: 1) She’s advocated for a return to the gold standard, and 2) She has recently argued in favor of lower interest rates—which could have the effect of pushing not just inflation-adjusted yields but also nominal yields into negative territory.

Some have already speculated that, if Shelton is confirmed and Trump wins reelection this November, she may be tapped to replace Jerome Powell as Fed chair when his term ends in 2022. During his tenure, Powell has repeatedly come under fire by the president for not cutting rates fast enough—something Judy Shelton may be more willing to do.

A lower-for-longer monetary environment has its benefits, to be sure. It’s great for borrowers. It makes it easier for companies and governments to service their debts. It encourages consumption. Indeed, rock-bottom borrowing costs have fueled U.S. household debt over the past decade, lifting it above $14 trillion for the first time at the end of 2019. Credit card debt alone hit a record $930 billion.

Negative Yields to Cost Investors $1 Trillion in 2020

What’s good for borrowers, though, is not always good for investors and savers. Low-to-negative rates make it challenging to generate income, and this may push investors into riskier assets such as non-investment grade and junk bonds.

Just take a look at what’s happening in Greece right now. Never mind the Mediterranean country’s BB rated credit. A bond rally there has driven Greek 10-year yields below 1 percent for the first time ever as income-starved investors pile into one of the few eurozone debt markets to still offer a positive yield.

Can you blame them? The mountain of negative-yielding government bonds around the world, now at $13 trillion, could inadvertently cost pension funds and other institutional investors as much as $1 trillion this year, according to estimates by Daniel Tenengauzer, head of markets strategy at Bank of New York Mellon.

Check Your 401(k) for This Bond ETF

But who buys negative-yielding bonds anyway? (And here I’m talking about nominal bond yields, not inflation-adjusted yields. When adjusted for inflation, these bond yields are even more negative.)

Don’t act surprised, but chances are good that you own some in your 401(k), especially if it holds passive ETFs that track international bond markets. One of the more popular ETFs, the Vanguard Total International Bond ETF, is highly concentrated in some of the biggest issuers of debt that trades with a negative yield. As of the end of last quarter, 19 percent of the ETF was allocated to Japan, where about half of all debt carries a yield below zero. That’s followed by 12 percent in France and 9 percent in Germany, both of which also have a significant amount of money-losing bonds.

Again, you may own this ETF, and others like it, in your 401(k) or retirement account without realizing it. It’s worth checking to make sure because even JPMorgan CEO Jamie Dimon, who once said he “would never buy a negative-rate bond,” did, in fact, buy not just one but a plethora, as the investment bank had a nearly-25 percent stake in Vanguard’s international bond ETF.

Record Municipal Bond Inflows

So where can fixed-income investors go for yield today? Even the long-term 30-year Treasury isn’t paying up. According to reports, the Treasury Department this week sold as much as $19 billion of 30-year bonds at a record-low 2.061 percent yield.

One of the most attractive sources of income right now is tax-free municipal bonds. Other investors have come to the same conclusion, as a record $105.5 billion flowed into muni bond funds in 2019, according to Morningstar. That’s significantly more than the previous record of $75 billion, set in 2009.

This raises the question of how to invest. As you can see in the chart above, investors are choosing to get access to muni bonds through actively managed mutual funds over passive vehicles such as ETFs. An incredible 90 percent of all muni inflows in 2019 went into mutual funds, the remaining flows going into ETFs.

Why the scramble for munis? As I’ve already pointed out, they may offer more attractive yields than some other options. And then there’s also the fact that they provide income that’s tax-free at the federal level and often the state and local levels. This feature no doubt appealed to many investors in high income tax states—including California, New York, New Jersey and others—who had their state and local tax (SALT) deductions capped at $10,000 starting last year, thanks to the Tax Cut and Jobs Act of 2017. And it isn’t just high-net-worth families who were affected.

Now that the law is in full effect, I expect demand for actively managed muni funds to stay high for the remainder of the year and beyond.  

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Happy Presidents Day

Gold Market

This week spot gold closed at $1,584.06, up $13.62 per ounce, or 0.87 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.12 percent. The S&P/TSX Venture Index came in off 0.64 percent. The U.S. Trade-Weighted Dollar rose 0.48 percent.

Date Event Survey Actual Prior
Feb-13 Germany CPI YoY 1.7% 1.7% 1.7%
Feb-13 CPI YoY 2.4% 2.5% 2.3%
Feb-13 Initial Jobless Claims 210k 205k 203k
Feb-18 Germany ZEW Survey Expectations 21.0 26.7
Feb-18 Germany ZEW Survey Current Situation -11.0 -9.5
Feb-19 Housing Starts 1400k 1608k
Feb-19 PPI Final Demand YoY 1.6% 1.3%
Feb-20 Initial Jobless Claims 210k 202k
Feb-21 Eurozone CPI Core YoY 1.1% 1.1%


  • The best performing metal this week was palladium, up 4.91 percent as hedge funds cut their bullish positions to a 17-month low. January’s 22 percent slump in China’s car sales could dampen demand short-term. Federal Reserve Chairman Jerome Powell testified before Congress this week and commented that “low rates are not really a choice anymore, they are a fact of reality.” Powell suggested large-scale asset purchases may be the tool of choice to address an aggressive downturn. Gold advanced on Thursday after the announcement of a surge in the number of coronavirus cases in China. ETFs increased holdings for the 17th straight day on Friday with total gold held by ETFs up 2.3 percent this year already, according to Bloomberg data.
  • Turkey’s gold reserves rose $778 million from the previous week to now total $28.3 billion as of February 7, according to data from the central bank. South Africa’s gold output rose the most in four years in December, according to Statistics South Africa data. Production unexpectedly rose by 24.9 percent from a year earlier, compared with 4.5 percent in November. Harmony Gold Mining bought AngloGold Ashanti’s last gold mine in South Africa for $300 million. This will make Harmony the largest South African gold miner and cements AngloGold’s withdrawal from the country.
  • Gold Fields raised $252 million in a share sale to fund the initial construction of a new mine in Chile, reports Bloomberg. CEO Nick Holland says the company believes it has a fully funded project. Paramount Gold Nevada announced that Rachel Goldman has been appointed chief executive and director of the company.


  • The worst performing metal this week was platinum, down just 0.21 percent in a muted week of trading. Agnico Eagle Mines fell sharply on Friday after reducing its guidance for 2020 gold output due to slower-than-expected ramp up at new mines in northern Canada, reports Bloomberg. Production guidance was lowered to 1.88 million ounces, down from previous projections of 1.9 to 2 million ounces with the share price off 15.63 percent by the close. Agnico has been a sector favorite for a management team that could effectively execute and create value.
  • Pretium Resources announced a big shakeup in company leadership this week with lowering of guidance. The board of directors is looking for a new president and CEO. Additionally, the vice president of geology and chief geologist resigned to pursue another opportunity. Pretium’s share price fell 24.39 percent for the week. New Gold reported revenue for the fourth quarter that missed even the lowest forecasts, reports Bloomberg. The company reported revenue of $139 million, down 12 percent year-over-year, and below the lowest estimate of $140 million.
  • Barrick Gold CEO Mark Bristow said in an interview this week that the company has proposed a $200 million upfront tax payment to Papua New Guinea as a way to help secure a new contract for long-term mining rights in the country. Renault’s acting CEO Clotilde Delbos said during an earnings presentation this week that the company’s main concern is palladium’s skyrocketing price. Citigroup said in January that automakers have a big incentive to find a substitution for palladium in catalysts as the metal’s rally continues.


  • Barrick Gold had a slate of good news this week. The company reported earnings per share that beat the highest estimate coming in at 17 cents per share. Barrick boosted its dividend by 40 percent to 7 cents per share. CEO Mark Bristow said that the company will exceed its two-year goal of selling $1.5 billion in assets by the end of 2020, reports Bloomberg. Due to asset sales, the world’s second-largest gold miner has the potential to reach zero net debt by the end of the year.

  • The Russian government is looking at giving $1 billion in funding from the National Well-Being Fund to help develop the Arctic Palladium project in Siberia, reports Interfax. The project is a joint venture of Norilsk Nickel and Russia Platinum. This is part of Russia’s plan to be the world’s top platinum metals producer, reports Bloomberg. Russia’s biggest gold miner, Polyus PJSC, is focusing on smaller projects and cutting its debt ratio before starting work on Siberia’s Sukhoi Log deposit, which accounts for more than a quarter of Russian gold reserves.
  • Sixth Wave Innovations, which developed disruptive molecular imprinted nanotechnology used for gold extraction, announced an agreement with Sumitomo Corporation that will greatly expand the company’s global distribution network, according to a press release. Metal Tiger is set to invest A$3.3 million into Southern Gold, an Australian and South Korean-focused gold explorer. Silver Viper announced strong drill results from its La Virginia Gold-Silver project in Mexico. High grade results provided in the press release include 196 grams per ton of gold and 984 grams per ton of silver over 0.5 meters.


  • Due to severe power cuts, production by South African manufacturers fell the most in over five years in December. Statistics South Africa data shows that manufacturing output fell 5.9 percent from a year earlier. The country’s power cuts continue to hurt the economy with unemployment remaining at the highest level in at least 11 years. Harmony Gold fell after the gold producer reported first half results where production profit was 16 percent below the market estimate.
  • The spread of the coronavirus continues to hit Chinese demand for jewelry. The death toll from the outbreak is now above 1,100 people and shoppers continue to stay at home as much as possible to avoid the virus. The economic impact from the global health emergency could very well send Chinese jewelry sales plummeting for the year.
  • Citigroup said that it no longer has a price target for Petra Diamonds as the range of valuation outcomes for the company are too wide, reports Bloomberg. The bank downgraded the shares to neutral from buy and noted a 70 percent share price decline over 12 months.

Explore the love trade and fear trade in this video

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.02 percent. The S&P 500 Stock Index rose 1.55 percent, while the Nasdaq Composite climbed 2.21 percent. The Russell 2000 small capitalization index gained 1.87 percent this week.
  • The Hang Seng Composite gained 1.74 percent this week; while Taiwan was up 1.75 percent and the KOSPI rose 1.43 percent.
  • The 10-year Treasury bond yield rose to 1.587 percent.


Domestic Equity Market


  • Real estate was the best performing sector of the week, increasing by 4.81 percent versus an overall increase of 1.44 percent for the S&P 500.
  • Nvidia was the best performing S&P 500 stock for the week, increasing 15.18 percent.
  • Shares of mobile communications companies T-Mobile and Sprint jumped on Tuesday. T-Mobile stock was up 11 percent and shares and Sprint was up 72 percent following the news that a federal judge approved the giant merger.


  • Energy was the worst performing sector for the week, increasing by 0.30 percent versus an overall increase of 1.44 percent for the S&P 500.
  • Under Armour was the worst performing S&P 500 stock for the week, falling 15.16 percent.
  • Shares in the Japanese automaker Nissan fell almost 10 percent after it cut its annual profit forecast and ruled out a second-half dividend. The automaker is still reeling from the scandal surrounding former boss Carlos Ghosn and cut its operating profit forecast for this year by 43 percent after vehicle sales dropped.


  • Apple added $18 billion in market value after its Chinese factories accelerated their post-coronavirus re-openings. Foxconn, which produces Apple’s iPhones and Airpods, hopes to resume 80 percent of all China production in March, according to Reuters.
  • Credit Suisse posted its best profit since 2010. The Swiss bank reported a 69 percent rise in annual net profit, just days after CEO Tidjane Thiam quit over a spying scandal.
  • Alibaba beat its quarterly revenue estimates. The Chinese online-shopping titan’s revenue rose 38 percent as its core e-commerce and cloud-computing businesses grew steadily.


  • Angry Bird game maker Rovio saw a massive 96 percent drop in profits last quarter due to higher user acquisition costs.
  • “I don’t like when investment bankers talk about EBITDA, which I call bulls— earnings,” said Charlie Munger, known as Warren Buffett’s right-hand man, about Uber using the metric in its plan for becoming profitable by the end of the year.
  • Google says the EU’s hardline antitrust punishments threaten internet innovation as it starts the first of three legal battles against $9 billion in EU fines.

Read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/where-to-get-income-in-a-low-yield-world/


By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors