You’ve Got to Ac-Cen-Thu-Ate the Positive (*)

Longstanding baseball fans fondly remember Hall of Fame pitcher Phil Niekro. The great knuckleballer had a strong motivation for making it as a pro, since the alternative was going to work in the coalfields like his father. When a Milwaukee Braves scout expressed interest in signing him, Phil’s dad stepped in to negotiate over the family’s kitchen table. The scout offered a contract for $275 a month contract and explained that the payment for signing would be $500. As Phil told the story, the senior Mr. Niekro replied, “That sounds good, except for one problem: We don’t have $500.”

This tale is probably apocryphal. It suspiciously resembles jokes based on the same misconception about the direction in which the money is supposed to flow, as with the signing bonus in Phil Niekro’s story. But the present role reversal in a large segment of the world’s bond market is no embellishment of the facts: On an estimated $17 trillion of debt, it is the lenders who are paying interest to the borrowers, rather than vice versa. Countries that currently enjoy the privilege of getting paid to borrow money include such heavyweights as France, Germany, Japan, The Netherlands, and Switzerland.

Income-oriented investors are understandably concerned about this unprecedented development.[1] The good news is that U.S. interest rates, while low by historical standards, remain in positive territory A wide range of corporate securities offer solidly positive real rates, that is, yields comfortably above the U.S. inflation rate, which is just under 2% at present, as measured by the Consumer Price Index.

Currently, 25% of the issues in the all-investment-grade ICE BAML Fixed Rate Preferred Securities Index yield 4% or more. Within the ICE BAML High Yield Fixed Rate Preferred Securities Index, 26% of the issues rated BB yield 5% or more. Our portfolios also draw from asset categories such as closed-end funds and Master Limited Partnerships. Their yields currently range from 5.20% to over 10%.

In short, income-seekers can lend to solid U.S. credits without having to pay for the privilege. On the contrary, they can stay well ahead of rises in the cost of living, the paramount goal of savers who derive their livelihood from their savings. Phil Niekro’s anecdote notwithstanding, there should be no confusion about who is receiving cash for sealing the deal between the users and providers of capital.

(*) The title of this piece is borrowed from a 1944 popular song written by Harold Arlen and Johnny Mercer. Negative interest rates prevail on vast amounts of debt issued outside the United States, but much more important to income investors are the still very positive rates on bonds of many solid U.S. issuers.

[1] Negative rates on bank deposits began to appear in Switzerland and Germany in 2014-2015. German government bond yields turned negative in January 2016.