The hunt for yield is getting harder than ever for fixed-income investors. Roughly 86 per cent of the $60tn global bond market tracked by ICE Data Services traded with yields no higher than 2 per cent — a record proportion — with more than 60 per cent of the market yielding less than 1 per cent as of June 30.
This has pushed investors into riskier segments in search of income, compelling them to lend to lower-quality companies and countries. Just 3 per cent of the investable bond world today yields more than 5 per cent — a share that is close to an all-time low, and represents a precipitous drop from levels seen roughly two decades ago.
“Yield-chasing behaviour has become much more pronounced,” said Matt King, global head of credit products strategy at Citigroup. “If you are a pension fund or an insurance company, you are forced to go down in quality and take extreme risk.”
In the late 1990s, nearly 75 per cent of bonds traded with yields above 5 per cent, while sub-2 per cent yields comprised well under 10 per cent of the market. That was before central banks responded to the 2008-09 financial crisis by slashing interest rates and launching massive bond-buying programmes that fundamentally altered the investing landscape.
In this year’s Covid-19 crisis, the Federal Reserve again cut interest rates to near zero, and pledged to buy an unlimited quantity of government debt. The central bank launched a number of emergency programmes to shore up an unprecedented range of securities — including junk bonds and municipal debt. Investors expect additional stimulus measures to be announced at either this week’s Fed meeting or the next one in September.
After the latest round of interventions, real yields on US Treasuries — which strip out expectations of consumer-price movements — have dropped to a nearly eight-year low. This move “is the direct consequence of all of the central bank support”, said Mr King. “It is the main force driving investors to pile into risky assets.”
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