Beware of the new "Widowmaker" Trade...
It's the biggest question for income investors today: How long can Treasury yields stay low?
The answer? A long, long time...
Right now, Treasury yields are hovering near record lows. In fact, the yield on the 10-year Treasury note just reached an all-time low as it fell below 1.4% in July.
Yields are so low that some investors believe they can't get any lower. After all, things have to turn around at some point, right?
Not necessarily... Take a look at the chart below.
The chart above shows the yield on the 10-year Japanese bond during the past 20 years. As you can see, after falling sharply in mid-1990s, yields on Japanese government bonds have yet to fully recover. They've only bumped above 2% on a few occasions, and then fell sharply lower afterwards.
In the past, many traders have bet against Japanese yields under the assumption that "things have to turn around at some point." Each and every time, these traders got burned. In fact, this trade has become so notorious for producing devastating losses, that some traders have labeled it as "the widowmaker" trade.
Of course, there's a big difference between Japanese bonds and U.S. treasuries. The majority of the outstanding debt in Japan is owned by the citizens, rather than the global financial system.
But regardless of the differences, if you think U.S. Treasury yields "have no choice but to go higher"... then you should really reconsider. If Japan is any indicator, then treasury yields can stay low for a while.
Risks to Consider: The Federal Reserve has been pumping billions of dollars into the market in the wake of the 2008 financial crisis. If inflation risks flare, then the central bank will have no choice but to raise interest rates in an attempt to combat inflation.
Action to Take --> The Federal Reserve has pledged low interest rates through at least 2014. As a result, it's highly probable that rates will stay low for at least the next couple of years. That means yields on traditional income investments like savings accounts and certificates of deposits (CDs) could remain at depressed levels for quite some time, making it all that more important to seek out investments that will offer some sort of income while outpacing inflation.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.