What is the Search for Yield
Search for yield refers to the investors’ behavior that seeking more yield by allocating their investment into higher-risk investments such as corporate bonds and emerging market government bonds during the low interest rate environment.
The searching for yield behavior occurs when the real yield on low-risk investments falls into low levels due to the lower interest rates and higher inflation. The lower real yield on low-risk investment causes the safe investment can easily generate a good return by just saving money on it anymore. This influence investor to move their money to higher-risk investment in expectation of more return.
In other words, the search for yield is a concept of increased risk-taking in exchange for the higher expected return during the low-interest rates environment.
What Happen When Investors Searching for Yield?
In the high-interest rate environment and inflation is low, investors can earn easy returns by simply just leave their money in safe assets like Treasury bills. However, it becomes much harder when interest rates are low, safe assets tend to be riskier assets to invest.
Individual investors may search for yield by allocating money to stock markets. Funds might seek to improve returns by gearing through the carry trades which means borrowing in the countries where rates have been very low because borrowing is cheap, and investing in countries where interest rates have been relatively high.
By doing so, investors are taking advantage of low interest rates and borrowing to finance high-risk, high-return investments to boost returns, such as:
- Corporate bonds
- Emerging markets bonds
- Emerging markets stocks
- Commodities goods
However, the search for yield is not only affected the financial sector but searching for yield behavior can also affect the real sector as well. Once the fund extremely flows into commodities like gold, crude oil, metal, copper, and any other agricultural then the commodities prices rise and cause the production cost higher.
References: Vanguard, Reserve Bank of Australia, IMF