Race to Zero

With stocks selling off, investors are flocking to bonds, and US Government bonds in particular, so yields on those bonds are heading lower, and are now nearing zero. According to the US Treasury, at the close of business today (Thursday, May 5), the following are the yields on US Treasuries for certain maturities:

  • 1 Month: 0.92%
  • 3 Month: 0.62%
  • 1 Year: 0.48%
  • 2 Year: 0.59%
  • 10 Year: 0.92%
  • 30 Year: 1.56%

So for any maturity 10 years or sooner, a bond buyer will not even get a 1% current yield. Also, for anyone trying to decide between a 1 month and a 10-year maturity, it doesn’t matter – you will get the same yield, although, for the 10-year, the yield is locked in for that period of time. The cumulative deficit of the US Government may be $22 Trillion, but investors can’t seem to buy enough US Government debt.

Ramifications

Treasury yields at below 100 basis points and nearing zero makes alternatives more attractive. If you want total safety, invest in money market accounts, and make sure you spread your money around multiple banks if you have more than the $250,000 limit on FDIC insurance at one bank. If you want to stay in bonds but are ok with a higher risk level, look at investment grade-rated corporate or mortgage bonds, where you can earn in the mid-single digits.

Stocks Look Good

Above that, you can consider stocks, perhaps dividend-paying stocks, which look good against sub-1% Treasuries. Stock investors have been saying “TINA” (There Is No Alternative) for several years now, and it remains true today. If an investor wants to make some money in a diversified portfolio, now more than ever, they need to be invested in the stock market.

IMO

It’s still winter, meaning it is still flu season. Covid-19 originated in Wuhan, China. If you believe the statistics from there, Covid-19’s spread is ebbing there, even during winter. That is good news. The stock market has been selling off because Covid-19 seems to be spreading relatively quickly throughout the world. If the trend that has played out in Wuhan plays out in other affected areas, by 30 days from now, the news should be better. All of this argues once more for owning a diversified portfolio of equity and debt and for holding on to it for the long term. Don’t panic and stay your course.

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