The Current Yield Environment

September 05, 2013 | Eric Gaylord, CFA, Principal

The S&P 500 returned -3.1% excluding dividends for the month of August. As the bull market seems to be losing steam, institutional investors will likely see lower returns from equity markets. Further compounding future portfolio returns is that bond prices are likely to be hampered by the threat of rising interest rates. Looking forward, a larger portion of investors’ returns may rely on receiving income in the form of interest and dividends rather than price appreciation.

With that in mind, we focus this week’s chart on asset class yields. Although the 10-year Treasury yield rose sharply in the 2nd quarter, this rise did not represent a parallel shift of the yield curve: yields on the shorter end of the curve remain low. Consequently, traditional bond portfolios with lower duration are still faced with the challenge of low yields, and the yields-to-maturity of the U.S. and Global Aggregate Bond Indexes remain compressed at 2.48% and 2.14%, respectively. Looking purely at yield, we see that senior secured loans (as measured by the CSFB Leveraged Loan Index), real estate (NCREIF Property Index), emerging markets debt, and high yield bonds are all yielding more than double the core bond market. Additionally, senior secured loans and real estate, in particular, offer lower interest rate risk. As such, these asset classes continue to offer compelling diversification benefits as components of an institutional portfolio.