Yield Chasing
Yield chasing is the process where investors, driven by central banks' low or negative interest rate policies (ZIRP or NIRP), look for higher returns in riskier financial assets due to the inadequate yields of government securities. This trend is often seen when traditional, safer investments fail to offer appealing returns, compelling investors to venture into more speculative territories. Behavioral finance suggests that given the choice between a guaranteed loss and a risky bet, individuals are inclined to choose the latter, a decision further influenced by narratives that justify the risk as a seemingly prudent choice.
Rationalization of Risk
Investors engaging in yield chasing may adopt optimistic narratives to rationalize their choices, such as believing in the sustained high prices of commodities like oil or expecting stability in currency exchange rates. This optimism extends to the equity and real estate sectors, where the lack of alternative investments, often summarized by the acronym TINA ('There Is No Alternative'), convinces investors of the viability of their risky endeavors despite the underlying market desperation.
Role of Financial Engineers
In response to this demand for higher yields amidst low-interest income, financial engineers work to restructure corporate capital in ways that superficially increase returns, often by increasing leverage. This creates a demand for their services but also contributes to a fragile financial system laden with malinvestments and a greater risk of a market downturn, which yield chasers may acknowledge internally but choose to overlook, banking on the short-term unlikelihood of a market collapse.