"Dude, where is my yield ?"

It's the silly season and as far as financial markets are concerned, we have to conclude à la Monty Python : "Stop this sketch, it's becoming too silly". In the current era of financial repression, we have witnessed mind blowing levels of interest rates. The following table gives you a short overview of the current government bond levels levels in the developed West (for European corporate bonds, the Belgian OLO curve is a good proxy). And to be clear, it concerns nominal yields so corrected for inflation, the outcome is even more grotesque :

So we have negative to zero yields in several safe havens, even until 5 y maturities in the case of Switzerland. In the US, the 5y yield hit another record low today, also grotesque in view of the budgetary outlook and in relative terms compared to other nations. Some other considerations :

1) How do pension funds and insurance companies such as Swiss Re, Allianz or other closer to home manage to match their future liabilities in this low yield environment ? Some will argue to follow the Scandinavian example and broaden the investment horizon into other assets and foreign currency (cfr recent changes in Sweden & Denmark). But that of course comes with an additional risk as well. The Norwegian Pension Fund by the way did the same some years ago with equities (not exactly nice timing) and diversification into European EMU periphery bonds. Just to prove that "errare humanum est" : "The point is, do you expect these guys (Greece) to default ? Norway has taken the view that they will not. Even though the situation is difficult and will continue to be difficult, you get compensated with regard to the yields you are getting" Yngve Slyngstad, CEO Norway PF, Bloomberg interview 09/09/2010

2) I am not a believer in perfect free markets because I think it's an illusion and a paradox when understanding Smith's Wealth of Nations (at best inspiring for the majority of players amongst us). But what is happening here, is of a total other dimension. The market efficient outcome - if it can somehow be reached in a second best scenario - is moving further and further away from us, day by day. It has become an extremely difficult exercise these days to calculate risk, risk premium, liquidity premium - that is if they still exist - and fair pricing of fixed income assets.

In the blog sphere, we came across another interesting view on this where a comparison is made with the gambler playing against the House :

http://www.researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_June_2012_Playing_Against_the_House.pdf

And there is in fact a point to be made : A big difference between investing in sovereign bonds on the one hand, and investing in corporate bonds/equity on the other, is that the House (public policy makers) can change the rules at any time. Individuals have no power to change for instance the coupon of the bond. It takes one call towards a central bank somewhere and the coupons can and will change : governments do have indeed the power to change the rules of the game in their favor. So betting against the House can be tricky business and a losing strategy.

The current punishments prudent investors/depositors are receiving right now is a bit like what happens in the opening scene of the Big Lebowski : The Dude - or his Dudeness - arrives at home, gets attacked from out of the blue and is mistaken for some one else. Even worse, they don't even understand that he is a bowl player.

http://www.youtube.com/watch?v=r9twTtXkQNA