As Deutsche Bank kindly reminds us today, on Monday it will be exactly 5 years since the Fed made the historic move to drive interest rates to zero (well, 0-0.25%) where they have remained ever since. In the same announcement the Fed reaffirmed its commitment to purchase large quantities of agency debt and mortgage-backed securities, a policy that after numerous changes also continues to this day.
The chart below shows the total returns of different global assets over this "unique five-year period" of ZIRP. It’s fair to say that the Fed have created a marvellous environment for virtually all assets even if this remains one of the weakest economic recoveries on record in the US and through virtually all of the DM world.
Deutsche Bank adds:
Only Greek equities (-24%) in our sample have seen negative returns. The standout asset class over the past 5 years has been high-yield corporate bonds, with total returns in Europe of 151% and in the US of 142%. We did a back of the envelope calculation to work out where European HY yields would have to go to see returns of 150% over the next 5 years. The answer was around -47% – although we’d warn you that the calculation did break our computer and it is very dependent on the path of yields. Anyway, it’s not going to happen so no need to get bogged down in the calculations. DM and EM equity has also performed strongly with the US leading the way. The S&P 500 has returned 120% compared to the MSCI EM return of 103% (albeit increasingly under-performing DM over the last couple of years). European equities have lagged (but are catching back up) given the sovereign crisis. Core markets have still seen strong returns though with the FTSE and the DAX both up more than 90% whilst most peripheral markets have still seen positive returns with Spain’s IBEX (+37%) and Italy’s MIB (+12%) higher. Nevertheless the peripherals have under-performed with Greek equities still negative as discussed at the top. Commodities have also performed well over the 5-year period but with most of the returns front-loaded in the first half of the period. Overall copper (+145%) is leading the way with gold something of a middling performer up +47% after a fairly sharp decline from the peak.
Within the DM fixed income universe, HY has been followed (in order of performance) by Fin Sub Debt (around +70%), IG and Fin Sen Corporate Debt (+50%) and finally government bonds (Gilts +34%, Bunds +23% and Treasuries +12%).
DB's conclusion: "When you see the scale of returns seen in these assets it’s hard to imagine that withdrawing QE or ZIRP will be particularly easy for assets." Which is perhaps why withdrawing QE or ZIRP will never happen voluntarily.
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