September 13, 2021
With real rates below zero right now, many short-lived investors are being forced to turn to increasingly risky assets, including high yield junk bonds. But even these no longer offer a positive real return, with inflation at multi-year highs.
According to an estimate by Jim Reid of Deutsche Bank, 85% of the US high yield bond market is currently yielding below the annual inflation rate. It is important to note that this figure has never been higher than 10% in the past. Even if the Consumer Price Index (CPI) fell to 3% (from 5.4% currently), it would still be above 35% of the high yield bond market.
And it’s not just the United States For the first time ever, inflation-adjusted yields on European rated debt turned negative after consumer prices rose the most in more than a decade in Europe.
Stock prices have risen significantly so far this year, which is good, but it has had the effect of making the dividend yield less attractive. As of Friday, the S&P 500 dividend yield was 1.32%, the lowest point since March 2002, and well below the annual inflation rate.
So where is the return? Some investors were hoping to try their hand at crypto lending, but the future legality of this activity is now in the air.
Coinbase’s crypto lending program halted by regulators
Before continuing, it’s important to note that crypto lending isn’t entirely new. Similar to securities lending, it allows investors to earn interest on certain crypto holdings. Some online platforms already allow customers to lend their assets in exchange for income.
But not Coinbase, America’s largest cryptocurrency exchange, which has been hoping to launch its own crypto lending platform for months.
That’s because the Securities and Exchange Commission (SEC) warned the company that if it took the next step in launching the service, dubbed Lend, the SEC would sue. Worse yet, the SEC refuses to explain which law Coinbase risks violating; nor will it give any guidance on how Coinbase can launch Lend while complying with federal securities law. That’s according to Coinbase chief legal officer Paul Grewal, who detailed the company’s legal struggles last week in a blog post.
All Coinbase knows at this point, writes Grewal, is that it can “either keep the loan out of the market indefinitely without knowing why, or we can be sued.” He adds that regulatory uncertainty and ambiguity “only serves to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver.”
Indeed, investors are hungry for returns right now, and it looks like some will stay that way.
As I said before, common sense rules are important in helping to maintain a safe and level playing field for all parties. Imagine a basketball game without a referee. Cheating would have no repercussions. Now imagine the same game, but with too many referees, and with arbitrarily changing rules. Unfortunately, this is the scenario Coinbase is in right now.
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices of US companies. The Bloomberg Pan-European High Yield Index measures the market for non-investment grade fixed rate corporate bonds denominated in the following currencies: Euro, British Pound, Danish Krone, Norwegian Krone, Swedish Krona and Swiss Franc. Inclusion is based on the currency of issue, not the domicile of the issuer. The Consumer Price Index (CPI) is an index of the change in prices paid by typical consumers for retail goods and other items. The Harmonized Consumer Price Index (HICP), used primarily within the European Union, is a measure of the prices paid by consumers for a basket of goods and services. It is calculated using the same methodology in all countries to allow comparable measures of inflation. Annual (or monthly) growth rates represent the rate of inflation. Dividend yield, expressed as a percentage, is a financial ratio (dividend / price) that shows how much a company pays out in dividends each year relative to its share price.