Point de vue Why so negative? Finding value in US corporate bonds

Matt Brill
• Senior Portfolio Manager
23 août 2019
Why so negative, Finding value in US corporate bonds
Yields across the globe continue to fall to record lows

Points importants à retenir

  • Our view: Our view is the global search for yield will continue to lead fixed income investors to the US. We see high-quality US corporates as 'the only game in town' and believe these issues should continue to benefit from ongoing downward pressure on sovereign bond yields. This “quality trade” is likely to persist in the coming months and, as negative-yielding global bonds raise interest in the US market, we expect investment grade corporate yields to test their 2016 lows.

As yields across the globe continue to fall to record lows, many investors are now actually paying someone to take their money.

Currently, there are more than USD12 trillion of bonds with negative yields outstanding, which equal 24% of the global bond market.1 In Europe, the search for positive yield is especially challenging. Over half (51%) of the European bond market now yields a negative rate.1 Germany recently issued €5 billion of bunds at a price of €101.5, but these will only return €100 in two years with zero coupons paid.2 And according to Reuters, Austria is also rumoured to be planning to issue a 100-year bond at roughly 1% to feed yield hungry investors.

The US is currently the largest contributor of global fixed income yield While Europe and Japan account for 40.8% of the global bond market by market value, they generate only 2.8% of the income (figures 1 and 2).1 So where can yield-starved European and Asian investors find positive yields? Emerging markets like South Korea, China, Thailand and Indonesia have been positive yielding and account for 6.1% of global income generated from bonds.1 Developed but smaller debt markets such as the UK and Canada account for 8.1% of global income. The biggest source of yield is the United States, which contributes 77.9% of the globe’s fixed income yield, on only 44.7% of the debt.1

Figure 1: Bloomberg Barclays Global Aggregate Index – Market value by currency

Figure 1: Bloomberg Barclays Global Aggregate Index – Market value by currency
Source: Bloomberg L.P., data as of June 28, 2019.

Figure 2: Bloomberg Barclays Global Aggregate Index – Yield generated by currency (USD billion)

Figure 2: Bloomberg Barclays Global Aggregate Index – Yield generated by currency (USD billion)
Source: Bloomberg L.P., data as of June 28, 2019.

As the ECB considers rate cuts and additional bond purchases, Europe’s negative yield problem may only get worse. Potential interest rate cuts by the central banks of England, Australia, and Canada could compound the problem. To top it off, the Fed cut interest rates by 25 basis points at its July meeting.

 

  • 1 Source: Bloomberg L.P., data as of June 28, 2019.
  • 2 Source: Bundesrepublik Deutschland Finanzagentur GmbH, June 25, 2019.
  • 3 Source: Bloomberg Barclays US Aggregate Corporate Yield to Worst, July 8, 2016.

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns.

  • The opinions expressed are that of Invesco Fixed Income and may differ from the opinions of other Invesco investment professionals. Opinions are based upon current market conditions and are subject to change without notice.

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