Monday, November 29, 2021

Robert Shiller: short-term return on US government bonds could be negative

The situation has become so bad for US bondholders that it could even lead to negative real returns – below the inflation rate – and stagflation, says Kristina Hooper

Robert Shiller warns that it could be long before there are a number of years in a row where the real return on US government bonds is negative.

He said: “If you look at what has happened so far, the last thing we would like to see is that return on stock (or on other safe investments) be negative and real returns be negative as well, you will have an era of negative returns”.

He was speaking on a business and investment programme at the annual FTSE International: Buenos Aires conference.

Shiller was chairman of the US National Bureau of Economic Research from 2004 to 2008 and the co-founder of Yale University. He created the cyclically adjusted price-to-earnings ratio (CAPE) ratio which shows how much investors are being paid to take on risk.

According to Shiller, the situation has become so bad for bondholders that it could even lead to negative real returns – below the inflation rate – and stagflation.

He said: “When you think about how much people pay for growth and inflation and asset valuations, I think you have to say ‘maybe it is a different way of being a sensible investor’ and consider paying people a little bit less or paying them a small premium”.

However, he said that one of the biggest dangers is that investors put all their eggs in one basket when it comes to investments.

“If you are about a few hundred basis points in the margin of safety, an 85% ratio – I’ve never been that close to being a better than an 85% margin of safety and I am an extraordinary risk management expert – so I’m always nervous when I come across that kind of number”.

He added: “I can’t say that’s a disaster – I just don’t know how many bets are being put in place on just one market”.

More significantly for the economy and investment market, if there are longer periods of depressed bond yields and inflation, then Shiller said the flight to quality could be even more pronounced.

“If yields on safe investments go negative you might say it is back to investment grade debt again,” he said.

If the US government borrows money to invest in infrastructure to boost growth then there would be a reduction in risk, Shiller said.

“Obviously the interest rate is one thing; duration and duration duration and duration duration and there will be no aspect where inflation is an issue.”

He said that if inflation is constant and falling then the government would effectively be “paying you less than 1%” to use the word invest it.

“I don’t think of it that way, I think of it as a psychological thing”, he said.

He added: “If you start thinking the world is not as fixed and the world is no longer flat, or different – there are different positions in the world, different emerging markets, different lending markets”.

He said that he would be more concerned about the negative psychology if interest rates were falling “because people start wondering ‘what’s the point’”.

A decade after the 2008 financial crisis, much progress has been made to shore up the finances of the global economy, a feat that has lowered the risk that a future crisis could devastate financial markets.

More broadly, the promise that technological advancements and machine learning will lead to a productivity boom has been met with scepticism.

Instead, many agree that the drive to destroy jobs and reassign responsibilities may be more important.

In September, Bank of England governor Mark Carney warned that the UK economy faced higher inflation and weaker investment as a result of automation.

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