September 9, 2021
There is absolutely no question that, from a historical standpoint, yields on U.S. government bonds are terrible. 10-year Treasuries that were issued at 1.25% a year are now yielding 1.297%, which is not terrific when the inflation rate is somewhere between 6% and 7%. If you go shorter term, 5-year Treasuries are trading at a yield of 0.788% a year, and 2-year Treasuries are offering a somewhat less-than-generous yield of 0.215%.
Those yields look stingy from a historical standpoint; just a couple of years ago, the 10-year Treasury rate was over 3%, and before the Great Recession you could have locked in 5% rates. But if you compare U.S. rates to what the citizens of other countries are getting, the American bond market looks positively generous.
Consider, for instance, investors in German bonds, whose 2-year, 5-year and 10-year bonds were issued at 0% rates; the government promised nothing more than that it would give you your money back at the end of the term. The 2-year bonds are trading at prices equivalent to an annual yield of roughly negative 0.738%, which is better than the negative 0.724% for 5-year bonds. Buy 10-year German government bonds on the open market and you can expect to lose only 0.464% a year.
European bonds in general are less-than-generous for their investors these days. Two-year Spanish government bonds, which were actually issued at positive yields, are now trading to yield negative 0.684%; the 5-year bonds are yielding -0.419% and you can eke out a +0.219% annual return if you go out ten years. Dutch, Belgian, and French bonds are similarly yielding negative returns across all maturities up to 10 years, while investors in Italian, Swedish and Portuguese bonds would have to go out ten years in order to get a positive return on their investments. Of the major developed nations, only Australia is offering yields comparably ‘generous’ to what the U.S. is offering.
If you’re shopping for higher yields, maybe you could consider Venezuelan 10-year government bonds, which are posting an unusually high 46% annual yield—which barely beats the 45% yield offered on Argentinian 10-year government bonds. Of course, then you would have to contend with Venezuela’s 9,986% annual inflation rate (down from 14,291% last year), which means the Venezuelan Bolivar is collapsing in real time, and your bond investment would be worthless in roughly a year. (At today’s exchange rate, you can buy just under 403 billion bolivars with a dollar. Five dollars will get you more than 2 trillion.) Argentina’s currency is devaluing at a comparably more modest rate of ‘just’ 47% a year, which might eat away at the returns offered by the country’s bond investments.
We can complain that our government bond investments are losing money to inflation today, and the complaint certainly feels justified. But investors in other countries actually have more to complain about than we do.
We hope that you and your family are safe and well!
Edward J. Kohlhepp, Jr., CFP®, MBA
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Founder & CEO
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