June 2020 IssueLong scroll reading

Not So Welcome Back ZIRP

By Charles Boccadoro

June begins the fourth month with yield on the 10-year US Treasury Note below 1%. Dating back to 1926, the yield has never been below 1%.

Since the Federal Reserve implemented its Zero Interest Rate Policy (ZIRP) in December 2008 to help combat the Great Financial Crisis (GFC), the yield has remained below 3% 113 of 138 months … or more than 80% of the time. The goal of 3% level seems to have become something of a new normal. It used to be more like 5%, the long-time average.

The last time the 10-year yielded below 3% for an extended period started in 1934 during the Great Depression. It lasted more than 20 years, through mid-late 1950s.

ZIRP lasted 7 years, through December 2015 … which represented much of President Obama’s tenure.

Under Chairman Janet Yellen and continued by Jerome Powell, the Fed tried to “normalize” rates by gradually increasing the so-called Discount Rate from near zero to 2.4% over a three-year period from January 2016 through December 2018. The 10-year rose above 3%. It did not last long.

The average US Treasury fund drew down about 11% during this period with longer duration being hardest hit, as one would expect. Vanguard Extended Duration Treasury Index (VEDTX) was off 20.4% during this period.  BlackRock iShares 20+ Year Treasury Bond ETF (TLT) off 15.2%. Its 7-10 year cousin (IEF) off 7.1%.

After the December 2018 sell-off, which wiped-out the S&P 500’s entire year gain, attempts to normalize rates stopped. And when the CV-19 crisis hit in March, we were back to ZIRP.

Bond funds in general have enjoyed a nearly 40-year bond bull market with rates generally declining. How many surviving bond funds are more than 40-years old … when rates actually rose? Well, just 40. They include Lord Abbett Income (LAGVX) and Putnam Income (PINCX).

Today there are 1250. Which means most bond funds (and perhaps more importantly most investors in bond funds) have never experienced periods of increasing rates.

Not that rising rates appears to be a risk anytime soon, but unless they drop below zero (please not), they have only one direction to go. With that in mind, and in the spirit of getting back to basics as described in last month’s commentary, the MFO Premium site has expanded its evaluation periods. They include the most recent “normalization” period and other periods since GFC of even modest yield increases, like Quantitative Easing 3 (QE3), which included the so-called Taper Tantrum in mid-2013.

The nine new periods are:

  • Quantitative Easing (QE) 1 – 200812 To 201003
  • Quantitative Easing (QE) 3 – 201206 To 201312
  • Normalization – 201601 To 201812
  • Zero Interest Rate Policy (ZIPR) – 200812 To 201512
  • Obama Bull – 200903 To 201612
  • Trump Bump – 201701 To 201912
  • Dec ’18 Selloff – 201812 To 201812
  • CV-19 Bear – 202001 To 202003
  • QE Infinity – 202004 To 202004

A brief description of each can be found here.

The period called Trump Bump offers opportunity to examine how younger funds behaved on the backside of the 11-year bull market that began in March 2009. The December 2018 Selloff requires no explanation, as does the (presumptive) CV-19 Bear period. QE Infinity will continue as necessary.

The MultiSearch tool now offers 57 evaluation periods to screen funds with some 80 different criteria covering fund risk and return performance and portfolio characteristics.

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.