Fixed Income: Why all the negativity? - J.P. Morgan Asset Management

Fixed Income: Why all the negativity?

Contributor Alex Dryden
In brief
  • Sluggish global growth, muted inflation and dovish central banks have seen bond yields fall sharply around the world. Currently, 28% of global government debt has a negative yield.
  • Investors should be cautious of holding government bonds at very low yield levels. The nature of bonds begins to alter at low yield levels and can lead to steep, short-term losses should bond yields suddenly reverse.
  • Lower bond yields have reignited the hunt for yield within fixed income. Outside of fixed income, lower bond yields often give rise to higher equity market multiples as well as providing a more supportive environment for gold.
Negative energy

Global bond yields have been falling sharply in 2019. As highlighted in Exhibit 1, 28% of government bonds trade with a negative yield and 50% of government bonds trade with a yield of below 1%. In total, an estimated $10.4 trillion worth of debt currently trades with a negative yield, one of the highest levels since December 2017.

Much of the negative yielding debt is concentrated in regions such as the eurozone and Japan, who account for 36% and 62% of negative yielding government debt, respectively. However, negative yields are not just constrained to government bonds: $754 billion of corporate debt also trades with a sub-zero yield, mostly in the eurozone.

Low, or even no, yields in international bond markets have weighed on U.S. Treasuries with the U.S. 10-year falling by 73bps since November 2018. Despite its current low yield, the U.S. government bond market still looks to be the best house on the block. At a yield of just 2.50%, it is higher than 90% of other developed market government bonds.

Exhibit 1: Percentage of global government bonds yielding in negative territory

Source: Bloomberg, BofA/Merrill Lynch, J.P. Morgan Asset Management. Index shown is the BoFA/ML Global Government Bond index. Data are as of April 30 2019.

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