Desperately Seeking Yield: 20 April 2021

By James Picerno, Director of Analytics

The recent rise in Treasury yields is on hold for the moment. So is the normally shifting sands of trailing yields for the various components of the major asset classes, based on a set of exchange traded funds. You can still find yield premiums in risk assets compared with government securities. But we’re now in a world of pondering the potential for higher inflation and higher interest rates, which further complicates the always precarious search for higher payouts.

One thing that hasn’t changed: the average yield on our ETF proxies representing the major asset classes. A month ago, the average trailing 12-month yield was 2.44% and there it remains as of yesterday’s close (Apr. 19), based on Morningstar.com data.

The range of current trailing yields for the various asset class components is essentially unchanged too: 5.07% at the high end via government bonds issued in emerging markets (EMLC) down to a lowly 0.91% for foreign property shares (VNQI).

Treasury yields at the short end of the curve remained pinned at near-zero rates while 10- and 30-year Treasury rates continue to tread water lately — 1.61% and 2.29%, respectively — relative to our month-ago update.

For yield-hungry investors, building a portfolio that maximizes payout while minimizing risk remains as challenging as ever. If, as some analysts warn, inflation and interest rates remain on an upward path (despite the recent pause), the blowback could be severe for some corners of traditional higher-yield assets. Factoring in total return is always prudent in some degree – even for yield-oriented strategies, perhaps more than usual these days.

One path is to consider the yields above in context with expected returns. For example, here’s how the major asset classes look on a long-run forward basis, according to a model that reverse engineers the outlook for risk premia based on risk.

However you approach yield-oriented portfolio design, keep in mind that using backward-looking data is a starting point rather than a solution for risk assets. Trailing yield aren’t written in stone. Unless you’re buying Treasuries directly, be prepared for surprises on realized yields going forward via ETFs.

The good news, there’s still opportunity to earn a competitive and perhaps a higher yield over 10- and even 30-year Treasuries. But there’s also a non-trivial risk of falling short and suffering capital losses. All the more so in the current environment following an extended runup in asset prices and the threat of more rate increases.

The main takeaway (still): No one can afford to ignore risk management, even in the desperate search for yield.

(An earlier version of this article first appeared at The Capital Spectator.com on April 20, 2021.)

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