My parents and I both agree that their generation has been robbed.
With low interest rates, central bankers have stolen the retirement income that people like my parents spent decades working hard and saving for.
It is impossible not to get angry thinking about it.
Across the world, those central bankers have declared war on savers.
I recently wrote to you about how global interest rates are now at the lowest they have been in 5,000 years.
That means we are living in a world with a Stone Age monetary policy.
We are in strange times…
As you might expect, this absurdly low interest rate world is creating some odd things.
Case in point, what I saw happen late last month…
There Is No Chance That This Will End Well
There are other investors who are badly hurt by 5,000-year-low interest rates: pension funds, insurance companies and other big institutions that have to try to generate a yield from their investment portfolios.
These institutions have no option but to own fixed income securities.
With the most secure places to earn interest income paying almost nothing, those institutions are being forced to take risks to generate yield.
In the business, we call this “chasing yield,” or taking on too much risk to generate too little return.
When it comes to chasing yield, what some institutions were doing late last month really takes the cake.
Somehow, the country of Peru was able to issue $1 billion of 100-year U.S. dollar debt at an interest rate of just 3.3%.
That means institutional investors willingly handed over money to the Peruvian government to hold for the next 100 years in exchange for annual interest payments of 3.3%.
Let’s break that down a little bit…
The best-case result for the institutions buying 100-year Peruvian bonds is a 3.3% annual return.
That is if everything goes right.
Now, let’s think about what the worst-case scenario might be…
What could possibly go wrong with turning over money to the Peruvian government?
Here are a few items to consider…
- In the month of November alone, Peru had three different presidents. Yep, Peru was able to issue $1 billion worth of bonds at 3.3% in a month when the highest office of the country looked like a game of musical chairs.
Not really a check marked in the “stable borrower” column, in my opinion.
- Since becoming independent, the country of Peru has defaulted on or had to restructure its debt on eight separate occasions.
Would you lend to someone who had declared bankruptcy eight separate times for a 3.3% interest rate? Of course not!
But that is what the buyers of Peru’s 100-year bond just did…
- Since 1985, every president of Peru but one has been impeached, imprisoned or sought in criminal investigations.
The government is notoriously full of corruption. There has been violence in the streets because of it.
On top of these obvious red flags in lending to Peru, the institutions buying these bonds are taking on several other huge risks.
They are assuming that interest rates aren’t ever going higher in the next 100 years. If rates go up, these bonds tank.
They are also assuming that Peru’s currency won’t take a dive. These are U.S. dollar bonds, so if Peru’s currency collapses, repaying those bonds will be much more difficult.
You get the point. Lending money to Peru for 100 years at 3.3% is, in my opinion, unquestionably madness.
This is the product of our zero interest rate world. Like retirees, institutional investors are desperate for yield, and these Peru bonds are perfect evidence of that.
Our Lesson: Don’t Chase Yield
Our takeaway from this as investors is that right now is the time for patience.
We can’t let ourselves settle for mediocre or straight-up foolish places to put our money.
The stock market is high, while interest rates are absurdly low.
Finding good places to generate income and capital gains is not easy today.
But it certainly isn’t impossible…
There are always opportunities in the financial markets – especially in the places that have fallen out of favor and are overlooked by the investing herd.
Good companies, sensible valuations and growing income streams are still out there.
It just requires a little more work to find them right now.