Investments to Fight Financial Repression


A couple of weeks ago on August fourth the US tenure treasury bond hit an all time low yield. Zero Point Five, two percent. It's a little higher than that. Now about zero point six, four percent. Yet. If we look at an equal weighted composite of ten year government bonds that includes Canada the euro-zone Japan, Switzerland the UK and the US. That composite interest rate is zero point three percent. If. We include corporate bonds and mortgage backed securities. The Global Aggregate Bond Yield is zero point eight percent in all time low. Now those are nominal yields that supposedly take into account that potential flation, but those rates are lower than what inflation has been over the past few years. Treasury inflation protected securities have a negative yield. That's the real yield. The tenure tip is yielding negative one percent. Global. Central banks have set their interest rates at all time low a composite of banks. The average short term policy rate is one point three, five percent. That's down from two point four percent in July twenty. Most developed countries have set their policy rate at zero. As investors if we are not able to generate a return that is greater than inflation, then our investments lose purchasing power over time. If central banks are implementing policies to keep interest rates low. Policies that benefit debtors borrowers because they can borrow cheap at the expense of savers that aren't able to earn even the rate of inflation on their savings. That is what is known as financial repression, its policies by central banks that hold down borrowing costs. These can be traditional monetary policy tools such as setting the short term policy rate. or it could be unconventional monetary policy such as quantitative easing central banks, purchase government bonds, or other bonds in order to put downward pressure on interest rates because they're constantly buying bonds. It could be yield curve control stating that they will buy as many bonds as possible to keep longer term rates low. It could be what the Federal Reserve indicate that they might do more explicit forward guidance in their June that are open market committee meeting. The minute said that it will be important in coming months for the. To provide greater clarity, regarding the likely path of the federal funds rate and asset purchases and that a number of the participants in favor of forward guidance tied to inflation outcomes that could possibly entail a modest temporary overshooting of the two percent target. What does that mean? The Federal Reserve has a target for inflation of two percent. They set their sights term policy rate, which is known as the federal funds rate at a level that they believe that unemployment will stay low but not too low that discharge to put pressure on wages and potentially inflation. And at a level that's low enough that households and businesses want to borrow to buy things to invest in capital projects to help the economy grow. But they're saying that they'll keep that policy rate low even if inflation exceeds the two percent target for time so that the average inflation rate is about two percent. The most recent inflation rate in the US was zero point six percent. If we exclude food and energy inflation rate was one point two percent that was through the end of June twenty twenty.

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