Non-Traditional Sources of Income in a Low-Rate World
Amid historically low rates, the income solutions of yesterday are not going to cut it. Global X ETFs has recognized and reacted to this paradigm shift by developing alternative, higher-yielding strategies.
Rohan Reddy is a research analyst with Global X ETFs. He joined Global X in 2015. He works within the firm’s research team, providing insights into the financial markets and Global X’s unique range of ETFs, including energy infrastructure, preferreds, covered calls, and dividend strategies. Rohan is also a member of the firm’s portfolio construction committee (PCC), providing model portfolio solutions to investors. He is a frequent contributor to the Global X blog.
I recently recorded a podcast with Rohan here.
Tell me a little bit more about your role at Global X.
I'm a research analyst at Global X and I've been here for a little over five years. We offer 77 ETFs. I specifically cover the firm's income suite of ETFs and I'm a market and product specialist within that area.
We're speaking just a few days after Joe Biden became the president-elect. In the last two weeks, rates have risen quite a bit. The 10-year yield is up about 20 basis points over that two-week period. What do you attribute that move to?
The risk-on sentiment is back in the market and the makeup of Washington is a big part of that. Biden was expected to win the presidency and the Democrats were expected to control the House. But the Democrats had an unexpectedly poor performance in the Senate race, and it will come down to two runoffs in Georgia in January. The reason that's important is because without control of the White House, it becomes harder to get legislation through. Democratic proposals at a broad level are expected to be a net negative for the markets, including Biden's proposal to raise the corporate tax rate from 21% to 28%. The status quo of a gridlocked Congress in some ways is viewed more positively by the markets.
The other reason is the news that we saw yesterday about Pfizer's COVID vaccine and its 90% effectiveness. It's the first real breakthrough we've seen on a potential vaccine and it speeds up the timeline of returning to a normal economic setting. Cyclicals and small caps rallied tremendously the other day in response to that.
That move in the last two weeks is in anticipation of Biden becoming president and the Senate remaining in Republican hands, which would be positive for business, positive for the markets and signifies a positive outlook for the economy. How does that translate to an outlook for interest rates and yields going forward over the longer term?
Yields have gone up recently, but the Fed has made it clear they're not looking to raise rates anytime soon. They've mentioned the end of the 2023 at the earliest. The Fed's balance sheet stands at $7 trillion and they're purchasing $120 billion a month in the credit markets. Fed Chair Jerome Powell just said that we shouldn't expect any major changes to its bond purchasing policy anytime soon. I would expect what we're seeing right now to be the status quo going forward.
The situation in Europe is even more extreme. Certain medium-term sovereign yields in Greece just went negative, something that may have seemed almost unfathomable just a few years ago. The ECB’s QE programs have been quite aggressive in Europe too. We believe finding income today is going to be very challenging, especially if inflation keeps ticking higher going forward. We don't think there's going to be a meaningful rise in yields for the foreseeable future even if there is another rally in the equity markets.