The reality is that monetary policy is headed in the other direction. In pursuit of growth and higher employment levels, the Federal Reserve – as well as its global counterparts – are reaching for every implement in the toolbox to keep inflation above two percent. If these central banks are successful, investors would be locked into negative yields for years to come.
At least these investments are safe ways to protect principal, right? Not exactly. These low yield investments carry significant interest rate risk. While the Federal Reserve’s promises to keep rates low lead to market expectations for a zero interest rate policy to be in place well through 2015, unless these policies fail to restore economic growth, the Federal Reserve will have to increase interest rates. Because these bonds carry low yields, today a mere 0.20 percent increase in interest rates would be enough to wipe out nearly a year’s worth of income for the 10-year Treasury. A 0.30 percent increase in the Agg’s yield would do the same to investment-grade bonds. Worse still, even greater moves in interest rates would eat into investor principal.
In short, investors seeking refuge from uncertain yields and volatile markets in safe-haven bonds may be jumping out of the proverbial frying pan – and right into the fire.
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief Investment Officer of Fixed Income, fundamental portfolios and team to develop BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities.