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 2.93% and a 30-year bond pays 3.09%. But when inflation is taken into account, the 10-year bonds pay less than -5.0% a year, and 30-year bonds yield -4.59%. That’s a negative return, but at least it’s something. The problem is that inflation at over 8.0%, is close to the highest it has ever been. Between 1913 and 2022 consumer price inflation averaged 8.5%, which is the highest since the 1980s. 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 2.93% and inflation rises to 8.5%, that bond would cause you to lose 5.57% per year. Also, the inflation rate of 8.5% is still expected to increase. If inflation rose to the highest levels, your real return would be much more negative. That’s the risk investors are taking to hold bonds.

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 their currencies can retain their value.

The only investments which retain value are real assets. While the value of financial assets fluctuates 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 assets like stocks, bonds, and cash.

However, now there is a liquid asset that has a time-proven value called SilverToken. SilverToken is a digital receipt for ownership of real physical silver. Each token represents a minimum of one troy ounce of 0.999 pure silver, insured and stored in one of 12 private vaults. SilverTokens can be sold back at the live spot price of silver or redeemed for physical silver. Hence, investors can now protect their wealth from the inevitable devaluation of fiat currencies and government bonds with a liquid real asset.

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