Perfect Storm for Income-Producing Securities

"He's no saleman for sure. Unless he's peddlin'...dynamite!"
--Doc T.R. Velie, Jr (Bad Day at Black Rock)

Perhaps the greatest challenge noted by participants at this year's RISE conference was increasing difficulties finding income-producing securities at an attractive price. This search is being driven by interest rate suppression by central banks, which is driving investors out of 'risk-free' Treasuries toward other asset groups. In fact, there was broad bearishness in Treasuries. USTs were labeled by some as being 'return free' rather than 'risk-free,' and perceived by some as possessing more risk than stocks at current prices.

BlackRock reps noted that they are recommending, and their funds are investing in, dividend paying stocks, corporates (including 'high yield' or junk bonds), Asian sovereign debt, and even securitized bank loans as alternative income generators. A gentlemen from a firm in Chicago noted that he was recommending non-agency mortgage backed securities to his firm's investment committee.

So, investors are once again walking the risk plank, bidding up prices of riskier, less liquid instruments.

Policy makers are getting what they want--they are forcing people to take more risk.

The timing couldn't be worse. We are coming off a credit bust that, if left to its own devices, would surely be raising rates and rewarding savers to clear away the bubble that inflated over the past decade. Current policies, however, do the opposite.

Compounding the problem is that more and more Boomers are retiring, which elevates the number of people looking for income than in the past as they move from 'accumulation' to 'distribution' phases of their investment years.

As investors reach for yield, prices of income-producing securities are rising much higher than the free market rate.  Increasingly, fixed income investors are overpaying.

This sets up a near perfect storm for this asset class during the next time down.

position in SPX, USTs