Wells Fargo Investment Institute - How investors can adapt to the negative real yield era

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How investors can adapt to the negative real yield era

Wells Fargo Investment Institute - October 29, 2020

Key takeaways

  • The extraordinary policy changes made by the Federal Reserve (Fed) in response to the coronavirus pandemic have ingrained sub-inflation yields (that is, negative real yields) as an enduring feature of U.S. and global bond markets. We believe this negative real yield era could persist for some time.
  • These policies have resulted in big changes to the yield distribution within U.S. bond markets, and a dramatic shrinking of the opportunity set for bond buyers seeking yields in excess of inflation. These changes may continue to have far-reaching ramifications for markets and investors.
  • We list several potential implications for fixed-income investors, some of which are already evident in current markets.
  • Risk assets should continue to get a boost as negative real yields may be more successful in driving further asset-price appreciation than in achieving the Fed’s goals of 2%-plus inflation and of stimulating the real economy.
  • More fixed-income investors may move further outside their traditional investment spheres, supporting credit markets.
  • Positive real yields available in emerging market bonds may find new buyers.
  • Gold may increasingly be seen both as a macro portfolio hedge for equities and as an alternative inflation hedge.
  • And the U.S. dollar may continue to be weak relative to the euro.

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