Why are bond yields going negative again? - J.P. Morgan Asset Management

Why are bond yields going negative again?

Contributor Alex Dryden

In 2019, the share of global government bonds trading with a negative yield has risen to 29%, its highest level since October 2016. Negative yielding debt is a strange phenomenon; buying a bond with a negative yield means that investors are willing to pay, in this case, governments to keep their money safe. Over the course of this cycle, we have seen an increased willingness among investors to hold bonds with negative yields, particularly when the economic outlook begins to darken.

Falling growth prospects, a muted outlook for inflation and the subsequent response by central bankers have triggered this most recent surge in negative yielding debt. A global manufacturing sector under pressure and steep decline in commodity prices at the end of last year has led central banks to take a more dovish stance, in turn driving down bond yields around the world. In areas like Japan and Europe, where economic outlooks are weakest, 66% and 38% of outstanding government debt trades with a negative yield, respectively.

A low, or even no, yielding world has reignited the global hunt for yield, and led investors to embrace higher risk areas of the financial markets. First quarter returns tell the story: U.S. high yield had its best quarter since mid-2009, returning 7.3%; emerging market debt (EMD) had its best quarter since 3Q 2012, returning 5.4%; and global equities rose nearly 11% in local currency terms.

As global central banks look to be on pause for much of 2019, higher risk sectors should continue to outperform. However, as we enter the later stages of this economic expansion, investors should be wary of taking on too much risk. While lower yielding Treasuries may not offer as juicy a stream of income as high yield or EMD, they do have negative correlations to equities. As such, given the potential for risk assets to stumble after a strong start to the year, a balanced approach to fixed income seems advisable at the current juncture.

Percentage of global government debt with a negative yield
Percentage of global government debt with a negative yield

Source: Bank of America, Bloomberg, Merrill Lynch, J.P. Morgan Asset Management. Index is the Bank of America Merrill Lynch Global Government Bond Index. Data as of April 1, 2019.

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