“Small pleasures, small pleasures
Who would deny us these?”

– Oliver Twist, It’s a Fine Life

Small pleasures, small pleasures, such as earning interest from bonds. What happened to those days, when one could retire and count on some sort of fixed income from interest bearing bonds or reduce risk by parking some funds in a money market fund and earn some interest while we waited for a better risk profile? Or municipalities earning enough interest on their short-term investments so that they could pay for necessary services while not having to raise taxes? Where have those pleasures gone?

Are these small pleasures a thing of the past? Yes! With over $18 trillion in negative yielding bonds globally, one has to be thankful for even smaller pleasures. Such as a zero percent yield. The Fed delivered in that respect, saying it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,”. Can anyone really define maximum employment and price stability? Do they both have to be met before the Fed reduces its purchase program?

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Federal Open Market Committee added in a statement that gained unanimous approval. However, the market was concerned because they did not say it would extend the duration of those purchases. In other words, they would focus their buying mostly in 5-year and lower maturities. What? How could they allow pension plans and insurance companies to continue to buy bonds at positive yields? That must be a mistake.

The Fed already had committed to not raising rates until inflation exceeds its 2% goal even if unemployment comes down to levels that normally had signaled price pressures. And that language was altered to an average of 2% inflation. Average over what time period? Nothing like clarity and transparency for investors to make calculated and educated decisions. Moreover, Fed Chairman Jerome Powell clarified that “[t]ogether, these measures will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete.”  Powell also emphasized that the Fed is following “outcomes-based” policies. Perfect, all crystal clear. We are waiting for a complete recovery based on unknown outcomes.

Do not misunderstand: the circumstances that pushed the Fed to these terms were based on a pandemic that no one predicted and was devastating to the economy, as the government shut down businesses. However, let’s also be clear that this low to zero interest rate path was set back in 2008. The European Central Bank, Bank of Japan and Swiss Central Bank were already at negative rates before this pandemic. Our own United States Federal Reserve lingered in the zero zone until mid-2016 when the US economy began to project a GDP north of 3%, and although inflation was not poking its head, the Fed began to raise rates. That was reversed in early 2019 when it was apparent that raising rates had been done prematurely and too quickly. We began to head back to zero and the pandemic just got us there sooner.

The Fed’s stance is quite clear: rates will remain low or at zero for a very long period, and with the type of financing the world governments will need to revive economies due to the pandemic, higher interest rates would be a catastrophic move on everyone’s behalf. Therefore, find pleasure in small amounts of income from fixed income securities. The Fed will not deny you this small pleasure. Actually, it will all but guarantee it.

Chief Investment Officer
Xavier Urpi
Chief Investment Officer