A Wall Street chief strategist breaks down why the stock market's recent meltdown foreshadows a more powerful trend that could haunt investors for years to come

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A Wall Street chief strategist breaks down why the stock market's recent meltdown foreshadows a more powerful trend that could haunt investors for years to come

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 7, 2019. REUTERS/Brendan McDermid

Reuters

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  • The latest sell-off in stocks occurred as central banks around the world lowered interest rates to fend off economic crises.
  • Bond yields, which fall when prices rise, plunged in tandem.
  • Beyond the immediate concerns about the economy, there's a worrying trend for investors that could persist - and one that a growing chorus of Wall Street experts is sounding the alarm on.
  • Click here for more BI Prime stories.

Investors are confronting the possibility that Treasury yields may not meaningfully recover from their decades-long decline anytime soon.

The most recent move lower sparked a sell-off in stocks as it signaled that economic growth was in distress. It coincided with the most significant escalation yet of the trade war between the US and China, and with numerous interest-rate cuts from central banks including the Federal Reserve.

But even if the trade war is swiftly resolved, or if fears about the economy dissipate, there are larger structural forces that could ensure Treasurys and other sovereign bonds continue to yield next to nothing, according to Mark Grant, the chief global strategist for fixed income at B. Riley FBR.

In fact, he thinks it is plausible that Treasurys eventually add to the record $15 trillion pile of global debt that commands negative yields. And he's not alone - even PIMCO, the bond-investing giant, has flagged its reasons for why negative yields can prevail in the US.

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Grant's view is that the negative bond yields across Europe and in Japan, coupled with demand for a safe haven from the US-China power struggle, will ratchet up demand for Treasurys. This would keep their yields compressed at best and turn them negative at worst.

In Europe, the central bank could soon commence a new wave of quantitative easing - the scheme of massive bond purchases that drove global bond yields into the ground after the financial crisis.

Having bond yields this low around the world is "a tragedy for investors," Grant told Business Insider by phone.

Read more: 'The greatest bubble ever': One market expert warns that a relentless bull market is on the brink of crashing and explains how to profit from its demise

But before you dismiss this as a phenomenon isolated to the bond market, hear Grant out. He has identified specific groups of other investors that could be hurt if yields stay lower for a while.

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"I think this is going to have a very negative effect on mostly US banks," he said. "It's also going to have a negative effect on Wall Street as nobody can pay anybody much interest."

For that reason, he doesn't recommend buying financial stocks, especially in Europe.

Grant added that lower yields represent a double whammy for pension funds and their clients who are saving for retirement. The fixed-income portion of their portfolios would come under strain amid low bond yields, he said. And as a result, pension fund managers may have to start taking extreme risks in order to earn decent returns.

"I wouldn't be surprised to see some pension funds going bust because they can't meet their yield bogey," Grant said.

Grant recommended investing in closed-end funds with the help of a skilled manager as the "best place" to find yields that are in the double-digits.

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He also advised looking for investment-grade bonds, where yields above 4% can still be found - but with additional risk than Treasurys.

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