How the yield trade is shaping our view of the world

The so called yield trade – which has pushed investors out along the risk curve into more risky assets seeking income – has trained individuals to think more critically about their assets they include in their investment portfolios, reckons Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist.

Since central banks have dropped interest rates to record low levels – in some cases to zero and even negative – it’s forced investors to find income in investments without traditional capital protection bonds have offered in the past.

The lower risk free rate resultingin a move out along the risk curve has been a learning experience for many investors, Oliver believes.

“In a sense we’ve become a bit more fundamentally focused. We’re focused on the cash flow, the dividend, interest rates and so on, which is different from what we saw prior to the yield trade becoming an emphasis. It’s changed the way we invest in things. We’re more focused on income and you’d have to say that’s a pretty good thing,” Oliver comments.

The so called “yield play” has been going on since the world has moved from very high inflation and high interest rates in the early 1990s, to the low inflation and low interest rates we have today, Oliver highlights.

The risk underlying the yield trade is when it gets “pushed to extreme”, potentially leaving investors stranded in places they may not have previously explored, Oliver notes.

“Yields will get pushed down as investors are making investment decisions mainly focused on the income. The danger is at some point inflation starts to creep up, interest rates start to rise, and then those yields will have to move higher again, which will then reduce the value of the underlying investments when that happens,” Oliver explains.

“When this will happen and how quickly it will happen is anyone’s guess. We think there will be some uptick in inflation as we go through next year, so that’s certainly worth keeping an eye on, to see how aggressive the Fed is at raising rates,” Oliver notes.

About the AuthorDr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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