Money markets and CDs are returning effectively nothing. There isn’t too much more yield to be found further down the yield curve: the 10-year U.S. Treasury rate is a measly 1.82%. And none of this is being helped by the Federal Reserve’s low short-term interest rate policy or its Operation Twist, which is suppressing long-term rates.
Many have complained on the behalf of American savers who are struggling because they aren’t getting the returns on their fixed income investments.
Unfortunately, the cost of having exposure to the safest, deepest, and most liquid fixed income market in the world (ie the U.S. Treasury market) is low returns.
Citigroup’s Global Equity Strategy team led by Robert Buckland is out with a report titled The Global Search For Yield. It tackles the very issues we just addressed.
The obvious conclusion is that if you want more yield, then you’re going to have to take more risk. The highest yielding securities can be found in the PIIGS, which have some of the most treacherous markets for the risk averse investor.
From a risk-reward tradeoff perspective, Buckland argues that investors seeking income may be best off heading to dividend paying stocks.
Cash rates in developed markets are close to zero. Core government bonds yields are almost at their lowest level in 50 years. Where there is yield in fixed income markets, investors have to take on considerable default or currency risk. By comparison the yield on global equities looks attractive.
Here’s a chart published in Buckland’s report that compares the yields of income securities across the globe.