Former Federal Reserve Chairman Alan Greenspan has a negative view on Treasury yields—literally—he foresees a fixed income environment with negative interest rates, which could come in “only a matter of time.”
It’s already a global phenomenon, but something that has yet to reach U.S. shores.
“You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States,” Greenspan said on CNBC’s “Squawk on the Street ” on Wednesday, adding investors should watch the 30-year Treasury yield, which hit an all-time low last week.
In addition, the 2- and 10-year yield curve spread is also flashing a recession signal with its inversion. As such, rates have been falling faster than a lead balloon, which could head into a territory U.S. government debt investors are not accustomed to seeing.
“We’re so used to the idea that we don’t have negative interest rates, but if you get a significant change in the attitude of the population, they look for coupon,” Greenspan said. “As a result of that, there’s a tendency to disregard the fact that that has an effect in the net interest rate that they receive.”
Further pressure on rates to fall can come from Greenspan’s former circles in the central bank. The overall sentiment in the capital markets is that another rate cut will happen in September with algorithms like the CME Group’s FedWatch tool predicting a 92.7 percent chance of a cut.
Navigating the Current Bond Landscape
While bonds have been the default safe haven amid the recent volatility in the equities market, it can be daunting to look at all the options, such as government debt and corporate bonds. One way to go about building a proper bond portfolio is to consider the risks first and foremost.
Given the latest market volatility, getting that bond exposure is still a must. Investors looking to gain broad-based exposure to bonds can look at funds like the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT). Investors looking for broad-based core bond exposure can look to a fund like the iShares Core US Aggregate Bond ETF (NYSEArca: AGG).