A quarter of investment grade bonds now yield below zero
Thursday 08 Aug 2019 Author: Ian Conway

Bond yields are plummeting as investors pour money into this perceived lower risk asset.

While low interest rates aren’t normally seen as a bad thing, it seems as though by continuing to push bond yields down markets are trying to tell the world’s central banks that they are deeply worried.

Their concerns range from the outlook for growth, the US-China trade war, poor global purchasing managers’ index (PMI) readings and persistently low inflation in the developed economies to the risks of a flare-up in the Middle East and what that might do to oil prices.

NEGATIVE YIELDS

According to consensus estimates, around $13tn or a quarter of all investment-grade bonds now have negative yields. In other words investors are actually paying the issuers to own them, meaning that if they keep them until they mature they will get back less than they paid for them.

As of mid-July over half of all European government bonds in issue, equivalent to $5tn, had negative yields. In Germany the yield on the 10-year government bond (Bund) is at a 700-year low of -0.5%. More worryingly, every maturity of German debt from one year to 30 years has a negative yield.

In the UK, although yields haven’t turned negative yet, the yield on the 10-year government bond (Gilt) is the lowest in history at 0.49%, even as political uncertainty increases with rumours that new prime minister Boris Johnson will call a snap general election.

Bond investors also seem to believe the Bank of England has room to lower its key interest rate from their current level of 0.75% after it admitted in its June Monetary Policy Committee notes that ‘downside risks to growth have increased’ since its previous assessment.

A RELATIVE TRADE

Another reason for the inflow of capital into bonds, forcing interest rates even lower, is that corporate earnings may have hit a peak and valuations of the world’s major stock markets – the UK aside – no longer look attractive.

Even with negative yields, bonds still represent a ‘safe haven’ and a relatively appealing place to put money. As long as interest rates globally are headed lower there is scope for bond prices to continue rising, which means that what investors lose in terms of interest income they could make up in capital gains in the short term.

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