US investors settle for no yield. What does this mean for SA?

JOHANNESBURG - It could be described as investment insanity. Lend your money to the government for a few months and expect nothing in return. That's the case in the US, where Treasury bills are paying no interest. It's been reported that the yield on some bills dipped below zero last week.

The last time Treasury bills offered such a dismal return was more than 70 years ago, in 1938.

Why are US investors prepared to invest on such disadvantageous terms? "If you narrow it down to a single issue, it's about capital security," says Arno Lawrenz, a fund manager at Atlantic Asset Management. "The bottom line is you're not going to lose any value."

Another factor that endears Treasury bills to investors, says Lawrenz, is their liquidity; they can be converted into cash at very short notice.

In other words, US investors are very pessimistic about their short-term investment prospects. They are happy just to protect their capital in what is viewed as one of the safest investments: a loan to the government.

Treasury bills have a lifespan of just a few months, but US bonds of longer maturity have similarly low yields.

So what does this mean for South African investors? Not much, says Lawrenz. "The bigger trend is really global inflation, not where bond yields are."

Lawrenz notes that that global inflationary pressures are not very high, with US factories operating at only two thirds of capacity. This low global inflation will impact on our Reserve Bank's decisions on interest rates, he reckons.

South African bonds don't have the same dismal yield as their US peers. The benchmark R157, which matures in 2015, offers an annual return of 8.4% - a real yield if inflation remains in the Reserve Bank's target range of 3-6%. Inflation-linked bonds offer a return of between 2.25% and 2.75%, depending on maturity.

Meanwhile the BCA Research has said that a "new interest rate cycle is underway" in some developed countries. It said it expects monetary policy to tighten fastest in those countries where the recession was mildest (like Australia).

"Our global fixed income strategists expect commodity-country bonds to continue to underperform. In contrast, the euro area and Japanese bond markets will outperform as their respective central banks have the most flexibility to stay on hold for the foreseeable future." BCA noted, however, that a "poor valuation starting point" will act as a weight on US treasuries.

Write to Julius Cobbett: julius@moneyweb.co.za

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Crazy bull market "Lawrenz notes.............with US factories operating at only two thirds of capacity." Can that be true? Surely things would be much worse if that were the case? by Anonymous on November 23 2009, 19:16 Find this comment inappropriate? Report it

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