Can The Fed Alleviate ‘Income Anxiety’?

December 15, 2015

The Slope Of The Yield Curve

If the consensus outlook for modest Fed rate increases is correct, can a steepening yield curve bring investors some relief? While possible, the weight of evidence suggests continued low bond yields, so the risk may be that the curve flattens further.

The global glut of savings and capital is a major factor in the suppression of bond yields at the longer end of the yield curve. Activity in the “real economy,” aimed at generating return on capital is subpar. So the savings of consumers, businesses and sovereign governments, such as China, stoke demand for income-paying, low-risk assets.

In addition, the policies of the larger central banks outside of the U.S. are aimed at lower bond yields, which increases demand for relatively higher-yielding U.S. bonds.

Many central banks have now set rates below zero. Some Danish consumers with floating-rate home loans are finding that the bank is now paying them interest on their mortgage. Maybe that’s the new yield play?

Ultimately, this international form of “income anxiety” could prevent the U.S. yield curve from steepening.

What Is The Best Game Plan?

So, what’s an income-oriented investor to do?

There has been no silver bullet for the income-oriented, risk-averse investor for the past several years, and it will take more than one Fed rate hike to change that situation. Sadly, for risk-averse investors, the 2016 answer to the question in our title appears to be no.

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