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there’s no return without risk



What would we give for that 14 per cent return on a 10-year bond now?

Now, let’s add insult to injury by taking into account inflation.

We all have our own inflation rate, depending on how we spend our money.

Anyone who has purchased petrol or food – or paid a gas, electricity or a phone bill – knows that inflation isn’t running at the government’s official rate of 1.6 per cent.

However, even using the government’s calculation, the ugly truth for conservative, pension-phase investors – those who would prefer a risk-free return to an equity market risk – is that the real inflation-adjusted return on bonds and term deposits is now, unbelievably, negative.


Older investors used to get a 5 per cent risk-free, and before that, their parents took a 10 per cent risk-free return, so they are understandably upset that they are “owed” a better deal than 1 per cent return on term deposits and a negative real return after inflation.

However, the truth is that there simply isn’t a better risk-free return than that. Hybrids come close, with a 3.5 per cent to 4.5 per cent yield, but they are not risk-free.

Judging by the trend in bond yields, headlines about zero to negative interest rates, the hangover of a decade of quantitative easing and growing concerns about a global recession, there is a good chance that low yields, zero yields and negative real returns are here to stay.

You can pray for a rate resurrection but the truth is the world can’t afford higher bond yields.

In a Catch-22, if rates bottom, it is going to wreak havoc globally.

From governments to companies, from consumers to mortgagees, many financial structures are founded on low interest rates.

For instance, there was a moment there when my sister in London was not going to be able to afford her mortgage if UK interest rates moved up by just 0.5 per cent.

Extrapolate that out over a world of debt and certain pockets of the globe cannot afford higher rates and would collapse. That means rates can’t rise because central banks can’t afford to let them.

I hope I’m wrong but don’t plan on 5 per cent risk-free returns coming back any time soon.

Plan on zero interest rates. Plan on earning next to nothing on bonds and fixed interest and term deposits from now on. Assuming that, the next question is what do you do about it?

The obvious answer is the equity market.

In the new world, unfortunately, there’s no return without risk.

Marcus Padley is the author of the daily stock market newsletter Marcus Today

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