As the Covid-19 pandemic continues to negatively impact the global economy central banks are forced to keep interest rates near zero. The Eurozone has had negative interest-rates since 2014 and the Federal Reserve has committed to maintain interest rates to near zero until at least 2023. This low yield environment may become the new norm.
In this lower for longer interest rate regime, long term-investors can no longer rely on government bonds for income. U.S. 30-year treasuries are currently yielding 1.44% while 30-year Canadian and German sovereign bonds are generating 1.11% and -0.048% respectively. These rates imply that investors would be earning negative real returns and erode their purchasing power after accounting for inflation targeted at 1.5%-2%. This erosion may cause significant challenges for retirees who are dependent on fixed income investments.
Investors may be forced further along the fixed income risk curve to simply maintain their purchasing power. Moving into longer dated bonds, municipal bonds, or corporate bonds can be a solution. With 30-year government bonds yields so low, it may not be enough. Some may need to consider a different approach like the Canada Pension Plan Investment Board's (CPPIB) by seeking alternative income sources such as infrastructure or REITS.
Infrastructure assets provide essential public goods or services that are critical to the function and growth of the global economy. They have long operational lives, predictable cash flows and can be resistant to economic downturns. Most infrastructure assets provide inflation protection as regulations and the monopolistic nature of their business allows them to pass the higher costs to the end users.
Investors may enhance portfolio yields, improve diversification and partially hedge against inflation by investing in global infrastructure ETFs. Mackenzie Investments launched Mackenzie Global Infrastructure Index ETF (QINF) on September 30, 2020.