I know this will be hard to believe, but there was a “Good Old Days” for safe savings. That’s a time when the interest rate you could earn on a safe investment was higher than the rate of inflation.
Those are rare times. Savers, most often, are losing while they save. They earn interest, but the purchasing power of their money is decreasing faster.
The message in the Matrix Book
Our last “Good Old Days” period began in 1981. It lasted thru 2001. Since then, it’s been hit or miss. Mostly miss. In this century, the yield on one-month Treasury bills has exceeded the rate of inflation in only three years –2006, 2007 and 2008.
I found this in the annual “Matrix Book” published by Dimensional Fund Advisors in Austin. One of the displays is a large triangular table. It shows, in blue or red ink, the yield on a one-month Treasury bill minus the rate of inflation for all time periods from 1926 through 2019.
It isn’t a pretty picture.
Lots of red. Covering much of a century. The rational conclusion is that what you and I like to think of as “safe money” isn’t treated very well. You can’t build wealth with it. And you can’t finance a long retirement with it.
Don’t get me wrong. There have been times of happy blue ink. From 1952 to 1972, for instance, you had a real return in all but two years.
You made a king’s ransom if you earned safe interest any year between 1926 and 1932. In 1932 the real return on a one-month Treasury was a stunning 12.5 percent. Unfortunately, it wasn’t because the interest rate was so high. It was because the rate of deflation was so great.
Interest income in, purchasing power out
Most of the time you earned something, but lost purchasing power. The only good thing is that you lost your purchasing power slowly. That, of course, is what’s happening now.
As I write this, the yield on a one-year Treasury is 0.13 percent. If we assume a 22 percent tax rate – not the highest, but not the lowest – that nets to 0.10 percent before inflation.
At the same time, the trailing rate for inflation – and the rate likely to be used for the annual increase in Social Security benefits in 2021 – is 1.3 percent. So, safe investing provides a net loss of purchasing power, 1.2 percent a year. The table below shows yields on different investments. The list includes some with much longer maturities. The best you can do is a slight loss of purchasing power.
And you can do that only by taking the interest rate risk of longer maturities or the credit risk of institutions that can’t print their own money, or both.
What happened to our rescuers?
So I’m wondering. Where are the “Bond Vigilantes” of yore?
They were brave souls. They rode their Bloomberg terminals at trading desks around the world. They came out shooting and selling. They rode to our collective rescue by selling bonds until bonds were worth owning again. (You can read more about the bond vigilantes here.)
Those who write our history will say the Bond Vigilantes are all dead, lost in unmarked graves. Like natives with spears and arrows charging a Gatling gun, no one on any bond desk could survive the firepower of our Federal Reserve bank. They buy tens of billions where the vigilantes fought in millions.
What does the extermination of the Bond Vigilantes mean for you and me?
It means the most useful actions we can take have nothing to do with investments or yields. They have everything to do with our ability to change our borrowing and spending habits.
Measuring the Long Drain of Saver Purchasing Power |
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| This table shows the yield on Treasury obligations of different maturities and a variety of large exchange-traded funds (ETFs) that invest in bonds, mortgages and tax-free securities. While the degree of risk varies with each investment, they all share one thing. After considering taxes and inflation, all virtually assure a modest annual loss of purchasing power. | |||
| Investment | Yield | After Tax Yield | After 1.3% inflation |
| 30-year Treasury | 1.45% | 1.13% | (0.17)% |
| 10-year Treasury | 0.70 | 0.55 | (0.75) |
| 5-year Treasury | 0.29 | 0.23 | (1.07) |
| 2-year Treasury | 0.14 | 0.11 | (1.19) |
| 1-year Treasury | 0.13 | 0.10 | (1.20) |
| Vanguard Total Bond Market ETF (BND) | 1.19 | 0.93 | (0.37) |
| iShares Mortgage ETF ( GNMA) | 1.44 | 1.12 | (0.18) |
| iShares Short Term Muni ETF (MEAR) | 0.31 | 0.31 | (0.99) |
| Vanguard Tax Exempt Bond fund (VTEB) | 1.11 | 1.11 | (0.19) |
| Sources: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield , https://morningstar.com | |||
Related columns:
Scott Burns, “The Trouble with Stock Prices: No Competition,” 9/05/2020
https://scottburns.com/the-trouble-with-stock-prices-no-competition/
Sources and References:
Daily Treasury Yield Curve https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield
Morningstar fund data https://morningstar.com
Wikipedia on the Bond Vigilantes
https://en.wikipedia.org/wiki/Bond_vigilante
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Karolina Grabowska from Pexels
(c) Scott Burns, 2020