Europe's Growth Problem And Your Portfolio
Published Friday, August 30, 2019 at: 7:00 AM EDT
Unprecedented negative yields in Europe continued to depress yields on U.S. Treasury bonds last week. The negative yields in Europe have caused an inversion of the U.S. yield curve and set off fears of a U.S. recession. Stocks rose anyway.
The yield on a 10-year German government bond this past week ticked lower, falling to -0.70%, making institutional bond investors from across the globe prefer U.S. Treasury bonds, which offered higher-yields.
Bonds are traded worldwide, and the most liquid types of bonds are U.S.-government guaranteed Treasurys, followed by German government-backed bonds. Since a 10-year U.S. Treasury bond pays a higher yield, institutions from across the globe are buying U.S. rather than German treasury bonds, depressing yields in the United States.
The extra cash moving into U.S. Treasury bonds instead of German bonds has pushed the yield of a 10-year U.S. government bond below that of the three-month Treasury bill for much of 2019.
On Friday, according to U.S. Treasury data, the yield on a three-month T-bill was 1.99%, while the long-term 10-year Treasury bond yielded 1.5%. Normally, yields on long-term fixed-income are higher than those on short-term instruments. Inversions in modern financial history usually were followed by recessions. However, the previous yield curves were caused by fundamental economic conditions and not negative yields in Europe, a condition never before seen.
Retirement income investors may want to consider how lower yields on fixed income allocations in their portfolios might be affected in the years ahead. The fundamental cause of low yields in Europe is its aging working age population, a long-term condition. The growth potential of the U.S. relative to other major economic powers is significant because of the demographic character of America. The baby-boom spawned an "echo" baby-boom generation that makes the growth path of the U.S. comparatively favorable.
The inversion of the yield curve has triggered fears of a recession, but it could be a false alarm. Indeed, the stock market did not seem alarmed. The Standard & Poor's 500 closed the week at 2,926.46, about 3% off its all-time record high, set in July.
This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.
- October Inflation Rate Slows, Spending And Income Cool, Making Further Rate Hikes Unlikely
- A Time Of Money Illusion
- Good News On Inflation Boosts Stocks For Third Straight Week
- The Terrible Truth About Investing
- The Goldilocks Economy Drove Stocks Higher This Past Week
- The Outlook For Investors
- More Economic Strength Sent Stocks Lower All Week
- Four Observations About This Week’s Financial News
- Not Too Hot Or Too Cold, This Week’s Economic Data Is Just Right
- S&P 500 Index Lost 2.4% In 3Q2023; Latest Inflation And Economic News
- Where The Boom No One Expected Gets Its Legs
- Latest On Inflation, Consumer & Business-Owner Optimism
- Slower Growth But Economic Outlook Remains Bright
- Labor Market And Inflation Drove Stocks Higher
- Costlier Homes Expected To Appreciate 4% Annually For The Next Five Years
- Leading Economic Index Falls For 16th Straight Month
- Tax-Sensitive Investment Planning In 2023
- A Healthy Recipe For Growth Is Simmering
- Good News About The U.S. Economy
- The New Bull Market Has Broadened
- An Economy Goldilocks Would Definitely Live With
- Monthly Pace Of New-Job Creation Slowed In June, Which Is Good News
- Standard & Poor's 500 Gained 9.9% In Q2 2023
- This Week’s News For Investors