Chasing Yield
Low Yields Tempt Investors
The extremely low yields on fixed income investments such as bonds, money market funds and savings vehicles at banks may be tempting investors to “chase yield” and incur more risk. 
When Standards Are Low
The Treasury bond has long been the benchmark for stability, but yields may go below zero:
The Treasury Department said it plans to decide by May whether to start selling securities that would let investors pay for the privilege of lending money to the U.S. government.
The current auction system doesn’t allow debt with a negative yield to be sold in the primary market. In the secondary market, where investors trade Treasury securities among themselves, yields on short-term debt often have been negative in recent months.
The Federal Reserve has signaled its intention to keep rates low for the next few years. Investment Advisors are worried that persistent low rates will induce investors to take more risk in investments that promise higher yield and seem safe. The Financial Industry Regulatory Authority Inc. (FINRA), the primary regulator for broker/dealers and investment advisors, released a 16 page letter indicating they are concerned:
“Finra is informing its examination priorities against the economic environment that investors have faced since 2008, as these circumstances have steadily contributed to conditions that foster an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud,” the letter states.
“Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields,” the letter continues. Lack of liquidity and inadequate cash flow in investments also are red flags Finra is monitoring.
Beware the Jabberwocky
While Treasuries and investment grade bond funds remain relatively safe for preservation of capital, there are hidden dangers in funds that focus on higher yields. Those of us who remember the “junk bond” defaults in the 1990s know that “fixed rate”, “bond” and “guaranteed return” are not synonymous with “safe”.
Investors seeking higher yields to “beat the market” may be able to move more of their portfolio to stocks, mutual funds, ETFs or other investment vehicles. Seeking out a fee-based investment advisor who does not generate commissions on sales of stocks and bonds would be the first step in this process. An investment advisor should assess your financial goals, risk tolerance, and the current market conditions to tailor an investment plan.
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