The stock market plunged again today, as investors grapple with worries over Brexit – the UK’s attempt at exiting the European Union. And it’s likely to remain in a state of chaos until June 23, when they vote on the matter.
The S&P 500 and Dow Jones Industrial Average experienced a 4-day losing streak, most likely in reaction to political uncertainty in Europe and Japan.
According to MarketWatch, a Bank of America – Merrill Lynch survey showed that fund managers are hoarding cash at levels not seen in nearly 15 years. And those who are investing are choosing government bonds, which have pushed yields to record lows.
How low are government bond values?
For the first time in history, the German 10-year bond, or “bund” yield turned negative for the first time, hitting minus 0.003%.
And the Germans are not alone.
Japan’s 10-year government bond also dropped to minus 0.19% and the Swiss 10-year fell to minus 0.55%. The British 10-year tumbled to an all-time low of 1.11%, but at least it remained positive.
Here in the U.S., the yield on the 10-year Treasury note slipped to 1.57% before bouncing back up a bit.
Real estate investors should be pretty proud of themselves. We are making far better returns than zero, or 1.57%. Hopefully, most of you are making over 8% because that’s the MINIMUM you should be making in real estate.
But the rest of the world seems to be OK with these historically low or even negative yields. But why?
Why would investors accept a zero return, or worse, a sub-zero yield – just to own government bonds?
Perhaps it’s their fear of deflation. Everyone talks of looming inflation yet governments have been trying to create it for years through all kinds of stimulus programs…with little success.
A gauge of future inflation expectations in Europe fell to a record low this week, in spite of massive stimulus attempts by the European Central Bank.
Japan’s core inflation hasn’t changed for a decade even though they’ve also resorted to ongoing and massive amounts of Quantitative Easing. Their experimentation with negative interest rates also hasn’t helped.
The U.K. hasn’t seen 2% core inflation since June 2014, and here in the U.S., the Fed has failed month after month to hit Janet Yellen’s 2% target.
The Federal Reserve is meeting now to discuss if they’ll raise rates this month. Of course they won’t. Higher interest rates are supposed to slow down inflation, but we don’t have inflation.
Why does the government want inflation so badly? We, the people, certainly don’t want it! Why would we want to pay more for things? They want it because it reduces the size of debt – and they’ve got plenty of that.
So coming back to why on earth asset managers would buy government bonds with zero or negative returns…it could be because that’s what the central banks are buying.
It’s not because they think those securities are good deals – they’re obviously not! And it’s not because there are underlying fundamentals. Bonds are basically an IOU coming from governments that are broke but have the ability to print money…so it appears to be safe.
And since central banks have been buying their own treasuries, investors are following in their footsteps. After all, the central banks wouldn’t want to let their government bonds collapse if they’re so heavily invested in them, right?
But if you haven’t noticed, European banks may not be the best investment advisors. Stocks for Deutsche Bank, HSBC Holdings, UBS Group -among others are plunging, thanks to the low interest rate environment and flattening yield curves.
They’re also overly exposed to bad loans from overseas expansions, not to mention endless government investigations, lawsuits and billion-dollar penalties.
How does this affect real estate investors?
Well, there’s good news. Mortgages rates are tied to the 10-year Treasury yield, and that yield has gone down – and so have interest rates. It’s a GREAT time to get a loan or refinance.
That could all change if the market reacts to the Federal Reserve’s announcement today as to whether or not they raise interest rates. If they don’t, which they won’t, we’ll probably see a rally in stocks. In that case, some money would move out of bonds and back into the stock market, driving mortgage rates up a bit. So lock in a low mortgage rate while you can.
Also, go ahead and pat yourself on the back for not being susceptible to all this market drama. As a real estate investor, none of it matters. All that matters is that you provide quality property to people who want it and need it.
And in doing so, you can secure your money to hard assets that don’t disappear overnight. And you can enjoy a steady monthly yield, over 8% after all expenses, not to mention tax benefits and potential appreciation.
Congratulations for being so smart and taking the road less traveled. Actually, it’s pretty well traveled. 8 million Americans own at least one rental property. Enjoy yours.