The Surprising Consequences of the Global Frenzy for Positive Yield

As the dollar soars, so does the real yield on bonds denominated in dollars.

As central banks rush to depreciate their currencies and push yields into negative territory, what’s becoming scarce globally is real yield in an appreciating currency.Real yield is yield adjusted for inflation/deflation: if inflation is 3% and bonds yield 2%, the real yield is negative 1%. If inflation is negative 1% (i.e. deflation), and the yield on bonds is .1%, the real yield is 1.1%.

What’s the real yield on a bond that earns 1% annually in a currency that loses 10% against the U.S. dollar in a year? Once the foreign-exchange (FX) loss/gain is factored in, the investor lost 9% of his investment.

Needless to say, the real yield must include the foreign-exchange loss/gain. An investor earning 10% in a currency that’s losing 20% annually against other currencies is losing 10% annually, despite the apparent healthy nominal yield.

An investor earning 1% in a currency that’s appreciating 10% annually against other major trading currencies is earning a yield of 11%.Clearly, the nominal yield is deceptive; the real yield can only be calculated by factoring in both inflation/deflation in the issuing economy and theappreciation/depreciation in the issuing currency against major tradable currencies.

Now we understand why what’s scarce globally is real yield in an appreciating currency: the only major trading currency that’s appreciating is the U.S. dollar. Any nominal yield on bonds issued in euros or yen turns into a loss when measured in U.S. dollars. Even the Chinese renminbi, which is pegged to the U.S. dollar, has slipped against the dollar as Chinese authorities have responded to the devaluation of the Japanese yen and other Asian-exporter currencies.

One result of the global scarcity for real yield is high demand for U.S. Treasuries, which are denominated in U.S. dollars. High demand pushes bond yields down, effectively replacing the Fed’s quantitative easing (QE) bond-buying programs, which the Fed ended last year.

The U.S. gets the benefits of strong demand for its bonds (i.e. low interest rates) without having to issue new money (QE).

Another factor is the reduced issuance of new Treasury bonds as the U.S. fiscal deficit declines. This effectively reduces supply as demand remains strong.

This is a self-reinforcing feedback loop: as the U.S. dollar strengthens and the U.S. fiscal deficit declines, the Fed has no need to buy Treasury bonds (with freshly issued money) to keep interest rates low. Since the U.S. central bank isn’t issuing new money while every other major central bank is printing massive amounts of new money to depreciate their currencies, this pushes the U.S. dollar even higher.

And as the dollar soars, so does the real yield on bonds denominated in dollars.That may not surprise everyone, but few can support a claim of predicting this a few years ago.

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  • According to the debt clocks available online, the Russian national debt as a percentage of Russian GDP is 11 percent. The American national debt as a percentage of US GDP is 105 percent, about ten times higher. My coauthors, Dave Kranzler, John Williams, and I have shown that when measured correctly, the US debt as a percent of GDP is much higher than the official figure.

    The Russian national debt per capita is $1,645. The US national debt per capita is

    The size of Russia’s national debt is $235 billion, less than one quarter of a trillion. The size of the US national debt is $18 trillion, 76.6 times larger than the Russian debt.

    Putting this in perspective: according to the debt clocks, US GDP is $17.3 trillion and Russian GDP is $2.1 trillion. So, US GDP is 8 times greater than Russian GDP, but US national debt is 76.6 times greater than Russia’s debt.

    Clearly, it is the US credit rating that should have been downgraded to junk status. But this cannot happen. Any US credit rating agency that told the truth would be closed and prosecuted. It wouldn’t matter what the absurd charges are. The rating agencies would be guilty of being anti-american, terrorist organizations like RT, etc. and so on, and they know it. Never expect any truth from any Wall Street denizen. They lie for a living.

    According to this site:
    the US owes Russia as of January 2013 $162.9 billion. As the Russian national debt is $235 billion, 69 percent of the Russian national debt is covered by US debt obligations to Russia.
    If this is a Russian Crisis, I am Alexander the Great.

    • Voice of Reason

      By golly, Molon Labe. If you don’t think just like Paul Craig Roberts! Anyhow, it sounds like the fate of the West now rests pretty much solely on its B.S. factory, AKA the main stream media.

      • YEP, here is more from someone else. Knowledge is power after all!

        Feb 1, 2015 Nomi Prins: The Sinister Evolution Of Our Modern Banking System

        In this well-detailed interview, Nomi goes into depth of the rationale and process behind the creation of the Federal Reserve, and more important, how its mandate — and the behavior of the banking system overall — metastasized into the every-banker-for-himself regime of sanctioned theft we now live with.

  • jadan

    Someday, economics will be practiced in the name of the public interest and the profession will look back on economists of the past, shake their heads, and marvel at what boot lickers they were forever catering to a social minority, the financial elite of investors, as the economic world crumbled around them and dissolved into chaos.