Click to enlarge chart:

Our chart above shows real 10-year government bond yields (adjusted for local headline inflation rates) for the US, Germany, and Japan. Japan’s low nominal yields were offset by deflation and low inflation during most of this timeframe, making real interest rates comparable. We suggest focusing on the trends, as headline inflation is volatile.

In the 1990’s, US and German real interest rates averaged 4%, and Japan’s were slightly lower. The memory of high inflation during the previous 15 years caused investors to be vigilant about its potential return. How investors would love those yields now! Since 2000, real interest rates have gradually declined towards zero as central banks have become sustained buyers and investors appear to have no concerns about future inflation. We think this makes for poor risk/reward to anyone buying at current yield levels.

Rod Smyth is the Chief Investment Strategist at RiverFront Investment Group, a participant in the ETF Strategist Channel.


Important Disclosure Information

Past performance is no guarantee of future results.
High-yield securities (including junk bonds) are subject to greater risk of loss of principal and interest, including default risk, than higher-rated securities.
ETFs are subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is based.  Additionally, the value of the investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are separate from those fees charged by RiverFront. Therefore, investments in ETFs will result in the layering of expenses.
Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability.
Strategies seeking higher returns generally have a greater allocation to equities.  These strategies also carry higher risks and are subject to a greater degree of market volatility.
Using a currency hedge or a currency hedged product does not insulate the portfolio against losses.
In a rising interest rate environment, the value of fixed-income securities generally declines.
RiverFront Investment Group, LLC, is an investment advisor registered with the Securities Exchange Commission under the Investment Advisors Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations.