What is Safer than Government Bonds?

Over the last 18 months the yield curve for US bonds has flattened to the point where the US 10-year bond is only 0.26% lower than the US 30 years bond. It’s possible we will soon see an inverted yield curve, which is usually taken as an indication of a looming recession.

So, what does a flattening of the yield curve mean, and what happens if the yield curve inverts? A yield curve is a graph that plots the effective interest rate on bonds of varying maturities. Usually, a yield curve plots the yield of bonds with maturities ranging from 3 months to 30 years.

Under normal circumstances, bonds with longer maturities pay higher interest rates. Higher rates compensate investors for putting their money at risk for longer. However, when investors lose confidence in the current economy, they would rather own longer dated bonds. When investors buy long dated bonds they force yields down, and eventually 30-year bonds yield less than 10-year and sometimes even 1-year bonds.

In January 2016, 30-year bonds yielded 0.74% more than 10- year bonds. That spread has now fallen to 0.26%. The curve has not yet inverted and maybe it won’t. Either way, there is more to the story.

Currently, a 10-year US bond pays 2.66% and a 30-year bond pays 2.98%. But when inflation is taken into account, the 10-year bonds are paying just 0.65% a year, and 30-year bonds yield 0.97%. That’s not a great return, but at least it’s something. The problem is that inflation at 2.01%, is close to the lowest it has ever been. Between 1913 and 2017 consumer price inflation averaged 3.23%, while it peaked at over 10% during the 1970s. Remember, true inflation is much harder, if not impossible, to measure but it is easy to spot as prices continue to rise.

If you buy a 10-year bond paying 2.66% and inflation rises to 3%, that bond would cost 0.34% per year to own. And inflation rate of 3% would still be below average. If inflation rose to the long term average, your real return would be negative 0.57% and if it rose to 5%, your real return would be 2.34%. That’s the risk investors are taking to earn a real return of 0.65%.

Bond yields are low because of the actions of central banks and because there are so few alternative “safe” investments. Quantitative easing has created a bubble in the bond market with little potential upside and a lot of potential downside. And if the bond market cracks, there is a very real chance of the USD losing value as well. With all the governments creating more and more money, it’s difficult to see how fiat currencies can retain their value.

The only investments which retain value are real assets. While the value of financial assets fluctuate over time, real assets retain their value. The biggest problem with real assets like gold, silver and real estate has been that historically they have been less liquid than financial asset like stocks, bonds and cash.

However, now there is a liquid asset that has time proven value called Silvertoken. Silvertoken is digital currency backed by real physical silver. Each token represents a minimum one troy ounce of 0.999 pure silver, insured and stored in a Class 3 UL vault. Silvertokens can be sold or redeemed for physical silver. Hence, investors can now protect their wealth from the inevitable devaluation of fiat currencies and governments bonds with a liquid real asset.