Jan 5, 2021 - Economy

A new low in the war on savers

Data: St. Louis Fed; Chart: Axios Visuals
Data: St. Louis Fed; Chart: Axios Visuals

The real yield on the U.S. 10-year Treasury note fell to its lowest level on record Monday, declining to -1.11%, meaning that, after accounting for expected inflation, holding a 10-year U.S. Treasury bond to maturity will mean losing more than 1%.

Why it matters: It's the latest entreaty in the war on savers. Central bank policy is rewarding risk-taking and punishing saving at a record level even as inflation expectations continue to rise.

What it means: The negative real yield on government debt encourages investors to move their money into risky assets like stocks in order to earn a return.

  • Real yields have consistently declined despite inflation expectations rising, an unusual phenomenon.
  • On Monday, the expected breakeven inflation rate on 5-year, 10-year and 30-year Treasuries all rose above 2%, the Fed's longtime inflation target, and their highest levels in more than two years.

Yes, but: Despite the unprecedented environment, uncertainty and fear have kept most Americans piling into bonds and savings accounts.

  • U.S. companies and municipalities issued a record amount of debt last year at record low rates, and investors bought $183 billion worth of bond funds between January and November. They also held $4.3 trillion in money market funds, according to data from the Investment Company Institute.
  • ICI data showed investors also sold $569 billion worth of equity funds during that time.

One level deeper: The U.S. personal savings rate has declined from a record 33.7% in April but was still at the highest rate since 1981 in November, even though the average interest rate on a retail savings account was 0.05% in November, according to the FDIC.

Watch this space: U.S. government debt pays significantly more than comparable European bonds on a nominal basis, thanks to the European Central Bank taking interest rates to -0.5%. But when inflation is factored in, U.S. Treasuries now pay — or cost — effectively the same as their European counterparts, Kathy Jones, chief fixed income strategist at Schwab, tells Axios.

  • "It's a natural outgrowth of Fed policy. They didn’t want to lower nominal yields at the short end [below 0%], so what’s happened is real yields have gone into negative territory," she says.
  • "It's a way for the Fed to do negative policy without negative yields."

Between the lines: Breakeven rates rose and real yields sank to new lows despite a down day for U.S. equity prices and minimal movement from the dollar — two assets that have largely moved in line with breakeven inflation expectations.

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