Even most junk bonds have negative “real” yields. And the Fed is still fueling this madness.
By Wolf Richter for WOLF STREET.
After a year of brushing off inflation as temporary, while inflation spread deeper and further into the economy, and got worse month after month, the Fed is finally talking about tightening. But so far, it’s just talking about it. It’s still repressing short-term interest rates to near 0% – with the effective federal funds rate, which the Fed targets with its interest rate policy, at 0.08%. And the Fed is still printing money hand-over-fist, though at a slightly slower rate than two months ago.
Meanwhile, the broadest measure of inflation, the Consumer Price Index (CPI-U) jumped by 7.04%, the highest and worst since June 1982, according to data released by the Bureau of Labor Statistics today. But we cannot compare today to 1982:
- In June 1982, inflation was coming down; now inflation is spiking.
- In June 1982, the effective federal funds rate (EFFR) was 14.2%. Today it’s 0.08%.
- In June 1982, the Fed did not engage in QE; today it’s still massively buying assets.
So now we have the bizarre situation where the EFFR is 0.08% and CPI-U inflation is 7.04%, and the inflation-adjusted EFFR, or “real” EFFR, is a negative 6.96%, the most negative real EFFR in the data going back to 1954:
The “real” interest rate on savings accounts and CDs is similarly negative in the -7.0% range. The real yield of short-term Treasury bills is similarly negative in the -7.0% range. Even the 10-year Treasury yield, now at 1.7%, is -5.3% in real terms.
Even most junk bonds are traded with yields below the rate of inflation. The average BB-rated “real” junk bond yield is -3.3%. Taking more risk, the average B-rated “real” yield is -2.0%.
You have to go to CCC-rated junk bonds – “substantial risk” of default – to get a yield above the rate of CPI inflation. Here’s my cheat sheet for corporate bond credit ratings, and you can see how far down you have to go and how much risk you have to take to beat inflation.
What the Fed is doing is called “financial repression.”
The Fed’s year-long refusal to deal with inflation, while talking down and brushing off this worsening inflation, after having triggered it with its monetary policies, including $4.6 trillion in QE – let’s just stick to calling it money-printing – in 22 months, cements this Fed under Chair Powell as the most reckless Fed ever as seen by the “real” EFFR chart above and by the Wealth Disparity chart below.
The cost of inflation is borne by the working people whose performance raises get eaten up by higher prices, and whose pay increases to deal with inflation get eaten up by higher prices.
But there were huge beneficiaries of these monetary policies: The folks who held the most asset, because these monetary policies had the effect of inflating asset prices across the board, and the wealth of the wealthiest 1% of households spiked, creating the biggest and worst wealth disparity ever to the bottom 50% and even to the bottom 99%, based on the Fed’s own wealth distribution data.
Wealth here is defined as assets minus debts. My Wealth Effect Monitor compares the wealth of the average household in each category. Note how the wealth of the already coddled 1% households spiked starting in Q2 2020 (red line), far outdistancing all other wealth categories, a testimony to the Fed’s effort to enrich the wealthiest the most ever during the crisis – and now the little people now get to pay for it with higher prices that the owners of these assets pass on to them. Here is my “Wealth Effect Monitor“:
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