U.S. government bonds, considered perhaps the safest assets in the world, are now losing money to the investors who own them.
According to statistics released by the U.S. Treasury, real yields on even longer-term bonds have fallen below zero since June 2020.
A „real“ yield calculates the annual return from holding a bond and collecting interest payments, adjusted for inflation.
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Bonds are traditionally considered the safest way to store wealth without being eaten by inflation. Their perceived safety is based on the belief that the U.S. government will never default on its debt, especially since bonds are denominated in U.S. dollars. Therefore, inflation moving above its yield is the only mechanism that could cause investors to lose money.
Currently, real annualised bond yields are as low as -1.13% for five-year bonds, while 30-year bonds are -0.32%.
It is worth noting that yield refers to the bond’s interest rate divided by its market price, which could deviate from its true face value, or how much investors will receive at maturity.
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Falling yields may be the result of rising bond prices, indicating that demand for safe assets is increasing. However, the current measures taken by the Federal Reserve have a net effect of discouraging bond allocations.
The Federal Reserve holding the markets
Cointelegraph previously reported that the Fed’s projections indicate an inflation rate in 2020 that is below the target. This, despite the trillions of dollars of assets added to the bank’s balance sheet, which were bought on the market with newly created dollars.
Massive injections of liquidity on all fronts, plus the Federal Reserve’s zeroing of the lending rate, which is reduced to the yields on bonds and consumer loans, are helping to boost dollar supply and consumption.
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In addition to ensuring adequate loan liquidity for Bitcoin Rush companies, during the 2020 crisis, the Fed began to directly support stock markets by purchasing specific ETFs.
But even if the sums involved are relatively small, at USD 75 billion, the bank’s actions are for now mainly a sign. Pankaj Balani, the CEO of Delta Exchange and a former traditional financial executive in Asia, told Cointelegraph that the Federal Reserve is expected to cover any downward market movement:
„Everyone thinks something might come up, which means the Fed might be thinking about that too. And unless there’s a big surprise, hopefully if the markets take a hit, the Fed will provide some support.
The combination of negative bond yields and the expected liquidity injections appears to be pushing investors into riskier assets, explaining in part why both equity markets and cryptosystems have been recovering virtually uninterrupted since the Black Thursday crash in March.
While cryptosystems are often considered an inflation hedge, most professional traders still consider them a high-risk asset. If the Federal Reserve’s strategy fails and the markets fall once again, it is likely that cryptomoney will do the same, at least in the short term.