The Bank of Japan, the European Central Bank, and several smaller European authorities have ventured into the once-uncharted territory of negative interest rates. But what are negative rates, and how do they come about?
These banking authorities have had historically low interest rates for the last decade or more in attempts to stimulate their weak economic growth. The results have been anemic.
So what does a negative deposit rate at the central bank accomplish?
It pushes down short-term rates on other types of lending. In theory, that is supposed to provide an economic boost. And, also in theory, it weakens the country’s currency.
One home mortgage customer in the Netherlands reported that his mortgage company paid him interest each month if he paid his principal payment on time. A good deal for the borrower, but not the holders of that currency.
It may surprise you where this Pursuit of Higher Yield brought these European investors. One U.S. municipal bond trader reported recently seven European insurance companies opened accounts. Most American investor thinks of municipal bonds as a lower yield.
However, the European insurance companies were comparing a negative interest rate to a 5.2% rate plus the most likely depreciation of European currencies. All of a sudden this makes the U.S. municipals attractive.
Where does an U.S. based person or entity go in Pursuit of Higher Yield? A review of the last ten years is helpful even though it is not a guarantee of future result and this blog is for educational purposes only.
With that disclaimer out of the way, let’s review data collected from McGowan Asset Management Group’s April 2, 2016 radio broadcast.
We heard a lot of doomer gloomers telling us after the Great Recession that the U.S currency was going to collapse and you better buy as much gold as you can stand. In fact, the U.S. currency has appreciated over that time as deflation hit the commodities market. They saw only an 8/10th of a percent increase.
What did better than commodities? Keeping your money in cash.
Here is how the bottom third of the market segments performed:
- Cash paid 1.8% with a current yield closer to 1% per year.
- Large Cap Stocks yield 4.1%
- S. Treasuries yielded 4.2% over that ten- year period.
Next we have the middle third of the market segments in the 5% range:
- Hedge Funds returned a mere 5.2% and so investors pulled $15.3 billion out of those funds in the first two months of 2016
- Municipal Bonds yield was 5.2%
- A Grade Corporate Bonds yielded 5.4%
Finally, we have the top third market segments average annual yield:
- Emerging market stocks were pegged at 6%
- Small Cap stocks returned 6.8%.
- Corporate B Grade High Yield bonds yielded 8.2%.
What was top of the list may surprise you even after the 40% decline in value in 2008. The top of the yield list was Real Estate Investment Trusts at 10.6% average annual yield over ten years. These trusts are required to return 80% of their Funds From Operation each year to unit holders.
What is even more amazing is what performed the best in the REIT sector. There are five self-storage Real Estate Investment Trusts with a capitalization of $31.8 billion. These companies own less than 10% of this fragmented market. A fragmented market is an inefficient market that provides great opportunity for those willing to do the work. Experts say it will be at least the year 2020 before the industry meets the current demand.
The five Self-Storage Real Estate Investment Trusts had a ten-year average annual return of 20.38%. Is there any wonder so many are excited about the Self-Storage industry?
One large high-end local hotel chain sold their marquee properties and invested in what you ask?
If some of the smartest property owners have made the switch to Self-Storage, would it not be wise for you to learn why? Get 9 Little Known Secrets For Steady Real Estate Income by adding you email to the pithy newsletter update list at self-storageinsider.com