2020 July Update - Long Dark Tunnel, but We Have Torches
The chart here shows what has occurred to Treasury yields. Rates are lower than they have ever been. For investors looking for yield…Ouch! All other fixed income investments available are based on a spread above Treasuries. Hence the entire universe of fixed income is seeing epic lows. Further, reference the Junk Bond ETF JNK, which is comprised of a basket of over 1000 corporate bonds that are considered the riskiest category in fixed income, is yielding 5.77%. High yields are not available in traditional instruments.
I recently read an article from the CFA Institute that made an analogy that fixed income investments are “Superman” and the current market environment is Kryptonite. The world is in massive debt and the economy is looking at a long recovery period. None of these factors imply interest rates will be rising anytime soon. “Superman” is in real trouble and no immediate help is available.
To further discuss the problems with this low interest rate environment let's talk a little about Bond Math. I will make this quick so your eyes do not glaze over. If interest rates rise, bond values fall. As shown in the chart above, and in multiple articles, the current yields on traditional debt are very low and will stay low, which means there is little investment value being generated by traditional fixed income investments. If interest rates do rise, the existing value of your fixed income investments will fall. Neither one of those points is a good option for investors looking to deploy new money in traditional fixed income investments.
Savvy investors will need to look toward alternative sources of income investments. There is no lack of options: trade finance, “specialty” finance, equity investing structures with a yield component, direct investing in private opportunities, fund of funds focused on income, options premium capture, CRE Debt financing, etc. Many of these strategies can be very complicated. I have torn apart many alternative strategies in my career and will tell you, sometimes if it sounds really complex it usually is, and that only creates more ways for it to fail.
Now more than ever I am excited for the Kirkland Income Fund due to its simplicity combined with the outsized risk adjusted return profile.
