The Chase for (no) Yield

A popular tale financial pundits and Fed critics like to tell around the campfire is that the Fed’s ultra-low rate policies have led to a speculative mania that has Americans chasing down risky investments for higher yields from sun-up til sundown. The “Chase for Yield” is, according to some, about to be our undoing – just look at the tremors caused by the early August blip of selling in the junk bond market for the latest evidence of this.

But what if the data suggested that, while many are ramping up their allocation to riskier assets, the lion’s share of people were not. What if it turned out that most people are doing just the opposite of “chasing” higher yields?

via MarketWatch (emphasis mine):

Data from the little-noticed financial accounts report show the American people have $10.8 trillion parked in cash, bank accounts and money-market funds that pay little or no interest. At the end of the first quarter, low-yielding assets totaled 84.5% of annual disposable personal income, the highest share in 23 years. Sure, people need to keep some money handy to pay their bills and some folks might have a few hundred or a few thousand in a rainy-day fund, but no one needs immediate access to the equivalent of 11 months of income. In essence, there’s $10.8 trillion stuffed into mattresses. That $10.8 trillion hoard represents a failure of Fed policy.

Since the Fed began quantitative easing in September 2012, U.S. households have socked away $1.17 trillion in their low-yield accounts. That means that 95% of the Fed’s $1.24 trillion QE3 ended up not in bubbly markets but in a safe and boring bank account. 

But don’t let that alter your narrative, which by now is probably immaculately delivered and quite compelling.

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