Over the past 40 years, lower interest rates have become the norm across the globe, culminating in the ultra-low, and in some cases negative, interest rates we are seeing in some parts of the world today.
Savers in some countries now commit to receiving zero interest. For bond investors this means no income from their investment, ultimately forfeiting part of the purchase price of a bond if they hold it to maturity.
Government bonds have morphed from their historical role in portfolios as a source of risk-free return to now being a source of return-free risk. Investors should not be fooled by the high historical returns of some government bond funds over the last year or two. Investors allocating capital are concerned with the yield to maturity, which is a forward-looking measure that reliably predicts future returns for long-term holders of bonds. For government bonds, this yield is invariably now very low.
We will avoid the question of why investors continue to invest in products with such low (or even negative) yields. There are several potential explanations, which have little to do with the need retail investors have for a secure, long-term income stream and a need for defensiveness in a multi-asset portfolio. Thankfully, there are ways for these investors to navigate this challenging environment.
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