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Got Yield?

A challenging bond market has fixed-income investors studying their portfolios.

By Jeffrey P. Goble

It’s December, and it is safe to say it has been another challenging year in terms of the search for yield for bond investors. I think this makes it year number eight for the challenging bond market, which was basically fueled by the Fed’s historic $4.3 trillion quantitative easing program started in November 2008.

Negative interest rates are still present in a few countries throughout the world, and some countries like Japan, for instance, actually capped their 10-year note yields at 0 percent. Austria recently took the bold step of offering a 70-year sovereign fixed-rate bond, and its yield auctioned at only 1.53 percent. I am pretty sure this is the longest-term sovereign bond ever issued, although corporations have issued 100-year bonds before.

Potential purchasers of this bond, who surprisingly outnumbered the actual quantity of bonds offered by a ratio of four to one, are betting that for the next 70 years 1.53 percent will look good. They may actually be thinking that anything that is not a negative number may look really good. These are unprecedented actions by foreign governments to stimulate their economies, and amazing long-term bets by investors, in my opinion.

You can see below how members of the Country Club Bank’s Top 10 Percent Peer Group (by total return) have navigated the difficult fixed-income waters this year. At present, their portfolios yield 2.77 percent with a total return of 4.07 percent. Total return includes the gain or loss of 1.30 percent in market value in their portfolios, thus creating a better and fairer apples-to-apples comparison between diverse portfolios.

Their average maturity of 4.03 years and duration of 3.59 years has served them very well, it seems. Their duration gap (average maturity – duration) is very narrow at 0.44 years so they have avoided excessive bond calls as rates have fallen. You may wish to compare your portfolio’s results to this high-performing group.

I have been thinking a lot about what 2017 might hold, especially since a Donald Trump presidency seems to be focused on growth and fiscal expansion, which in theory would make bond yields, stock prices and the dollar all rise. This is the opposite bet being made in Japan and in 70-year Austrian bonds, so it should be an interesting year.


Happy holidays and best wishes for a prosperous 2017. A special note of thanks to BankNews for the privilege of writing in this space over the past 28 years. Another thanks goes to readers who send me thoughts and comments throughout the year. I hope these columns have helped you make more money for your bank — and also sleep a little better at night.

The best is ahead!

Jeffrey P. Goble is chief market strategist in the Capital Markets Group at Country Club Bank in Kansas City.



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