At recent seminars, I have been taking the time to explain the current rate environment, and why rates are so low.I try to detail (without being too granular) the Federal Reserve’s policy of stimulating the economy by explaining both their:

• overtly communicated goal of decreasing lending costs to spur borrowing and consumption
• covertly hinted goal of inflating asset prices so that people “feel” richer

The result of this is that people who are conservative savers (that’s many people) are forced to choose between earning less than 1% in a bank account or taking some kind of risk to earn a higher yield. And when the Fed started this policy, if you WERE willing to take risk, you might have earned a decent yield for that risk.

After two years of relentless purchasing by large institutional investors who need yield to fund pension payments and endowment payouts for example, and purchasing by most everyone else, those same yields have shrunk. I had just pointed out last week, at a workshop that one of the popular junk bond exchange traded funds was yielding a bit over 5% – and how that was historically so low for something with that level of risk.

So low and behold, I see this headline from Zero Hedge:

Junk Debt Drops Below 5% Yield For First Time On Record

At this point I am not shocked. But understand that when the riskiest bonds are yielding less than the CD I owned in high school, we’re heading for trouble. At this moment, [Read more...]