“Low rates might be good for borrowers, but they play havoc with an investor’s portfolio. To achieve the returns they need, investors around the world are being forced to take on more risk simply to achieve yields that risk-free Treasuries and other fixed-income instruments used to offer.”
Mark Saukkola, CEO at KBS Capital Markets Group, “Investing in a low interest-rate environment,” Real Assets Advisor, November 2019
The Takeaway: Here’s a quick example of how low rates are impacting an investor’s portfolio.
Back in November 1981, 10-year Treasury notes (U.S. Government issued bonds) paid 12.92% in interest. So if you had a $1,000,000 portfolio (lucky you!), and invested in 10-year Treasury notes, you would earn $129,200 per year in interest.
Fast forward to November 2019. 10-year Treasury notes now pay 1.77% in interest. You’ve still got a $1,000,000 portfolio. Due to inflation, prices are much higher today, so you need much more income to afford the same lifestyle you enjoyed back in 1981. But guess what? Your $1,000,000 invested in 10-year Treasury notes now earns only $17,700 per year in interest.
That’s why many investors are leaving the safety of Government bonds and CDs and searching out higher income and higher returns in riskier bonds and growth-oriented investments. They just can’t make ends meet on the extremely low returns now offered by “safe” Government bonds.