Chasing Yield

Share on email
Share on linkedin
Share on facebook
Share on twitter

As bond yields drop to zero, investors take on unprecedented risk in search of yield. And hope the Fed has their backs.

With the Covid-19 crisis showing no sign of abating, the Federal Reserve has cut interest rates to near zero in an effort to prop-up the economy.  In addition, the Fed has pledged to do ‘whatever it takes’ to support the economy going forward.  This includes launching a number of emergency programs to shore up an unprecedented range of securities – including junk bonds and municipal debt.

Faced with dwindling yield opportunities, fixed income investors are increasingly chasing yield – and taking on alarming risk. It’s likely things will end badly for yield chasers.

Roughly 86% of the $60 trillion global bond market tracked by ICE Data Services recently traded with yields no higher than 2% — a record proportion. And more than 60% of the market yielded less than 1% as of June 30. This has pushed investors into riskier segments in search of income, compelling them to lend to lower-quality companies and countries. Just 3% of the investable bond world today yields more than 5% — a share that is close to an all-time low.

Yield-chasing behavior has become much more pronounced,” said Matt King, global head of credit products strategy at Citigroup. “If you are a pension fund or an insurance company, you are forced to go down in quality and take extreme risk.”

Pursuing high-yield bonds is fine when fixed income markets are calm. But let’s not forget the other reason investors include bonds in their portfolios: capital preservation. Junk bonds have risk profiles more like equities, and during economic downturns (like the current environment…), loss of principal is a major risk. 


We only have to look back little more than a decade to see what can go wrong when investors broadly chase yield. Prior to the Global Financial Crisis, yields had been low for quite some time following the Dot-Com Crisis.  Many investors dialed up their risk exposure to chase higher yields. When markets reversed, they paid the price. From May of 2008 to March of 2009, the SPDR Bloomberg High Yield Bond ETF (JNK) lost nearly 45%. Investors who reached for an extra 3% or 5% of yield were punished severely.

Now it’s not clear what the economy will do in the months ahead. Uncertainty is high. Possibly the Fed will orchestrate a smooth landing for risk assets and the economy. But I wouldn’t bet the ranch on it.

Constructing an income-oriented portfolio that relies on a Fed backstop for protection strikes us as unduly risky. Rather than count on governments or central banks to save the day, a wiser plan might be to diversify into a more stable asset class. Like asset-backed, income producing real estate.

This is where Aloha LTD Income Fund shines.  We’ve been discussing the hunt for yield, as it relates to the private lending strategy we employ, for 5+ years.  Our unique approach to producing high-yield returns looks better than ever in the midst of the current pandemic and interest rate environment. While asset classes like bonds, REITS and equities have seen major corrections since March, Aloha Fund investors have enjoyed consistent returns, no draw-downs and monthly income distributions arriving like clockwork.  Aloha Capital is glad to report such outstanding results in challenging times.  Further, Fund investors are responding with increased confidence by adding to their positions as well as sending us referrals whom they think will benefit from an investment with Aloha.

The Fund’s sixty-five month run of positive performance since inception continues! Please reach out with questions or concerns during this extraordinary period. In the meantime, stay well and safe. Aloha Capital appreciates the opportunity to serve you through this excellent investment–Aloha LTD Income Fund.

Investor Newsletter Sign-Up