Death Of The Risk-Free Rate

Death Of The Risk-Free Rate by Chris Brightman, Research Affiliates

Key Points

1. Abandoning the assumption of a positive risk-free rate alters our conceptions of money, monetary policy, and investment risk. Managing volatility, the traditional measure of risk, may now prevent us from achieving our investment objectives.
2. Direct money creation—like dropping money from a helicopter—is the widely discussed next step in central bank monetary policy experiments. Such direct money printing raises the long-run risk of inflation.
3. Today’s fear of deflation has produced a sale on inflation hedges such as commodities, bank loans, high-yield bonds, REITs, and emerging market equities. Investors can protect their portfolios from inflation and improve their expected returns by diversifying into such cheap inflation-hedging asset classes.

The risk-free rate is...