Investors Now Lose Money by Holding Bonds, Pushing Them Into Riskier Assets

United States government bonds, considered perhaps as the safest assets in the world, are now losing money to the investors holding them.

According to statistics published by the U.S Treasury, real yields on even the longest-term bonds fell below zero since June 2020.

A “real” yield calculates the yearly return on holding a bond and collecting interest payments, adjusted for inflation.

Bonds are traditionally considered the safest way of storing wealth without it being eaten by inflation. Their perceived safety relies on the belief that the U.S. government will never default on its debt, especially because the bonds are denominated in U.S. dollars. Thus, inflation moving higher than their yield is the only mechanism that could make investors lose money.

Currently, annualized real yields for bonds reach as low as -1.13% for five year bonds, while 30 year bonds net -0.32%.

It is worth noting that yield refers to the bond’s interest rate divided by its market price, which could deviate from its true face value, or how much investors will receive at maturity.

Falling yields can result from higher bond prices, which indicates that demand for safe assets is surging. Nevertheless, the current measures adopted by the Federal Reserve have a net effect of discouraging bond allocations.

Fed propping markets up

Cointelegraph previously reported that the Fed’s projections indicate an inflation rate in 2020 that is below the target. This despite the trillions of dollars of added assets to the bank’s balance sheet, which were purchased from the market with newly created dollars.

The massive liquidity injections across all fronts, in addition to the slashing of the Fed’s borrowing interest rate to zero — which trickles down to bond yields and consumer lending — are all contributing to push the supply and consumption of dollars higher.

In addition to ensuring adequate lending liquidity for businesses, during the 2020 crisis the Fed began directly propping up the stock markets by purchasing specific ETFs.

But even if the sums involved are relatively small at $75 billion, the bank’s actions are for now primarily a signal. Pankaj Balani, the CEO of Delta Exchange and formerly a traditional finance executive in Asia, told Cointelegraph that the Fed is expected to cover any market move lower:

“Everyone thinks that something might come up, which means that the Fed might also be thinking about it. And unless there is a big surprise out there, it is quite expected that if the markets take a hit, the Fed will provide some support.”

The combination of negative yields on bonds and the expected liquidity injections seem to be pushing investors into riskier assets, partially explaining why both stock markets and cryptocurrencies have been rallying virtually without a break since the Black Thursday crash in March. 

While cryptocurrencies are often considered a hedge against inflation, they are still seen as a high-risk asset by most professional traders. If the Fed’s strategy were to fail and markets fall once again, it is likely that crypto would follow suit — at least in the short term.