By Sunny Oh
A shrinking universe of income-producing assets for investors could heighten the investment challenge for yield-hungry pensions and insurance firms, as fears of a global slowdown and a eurozone recession drive investors into the perceived safety of bonds.
“The collapse in interest rates and [volatility] has seen the quest for yield re-emerge as the dominant investment theme,” wrote Marco Stoeckle, head of corporate credit research at Commerzbank, in a March 21 note.
Indeed, recent data show that the total amount of negative-yielding debt in bond issues represented in the Bloomberg Barclays Global Aggregate Bond Index /zigman2/quotes/200660887/composite AGG +0.22% stood at nearly $9.7 trillion, marking a more than 50% increase from September.
That means investors are faced with an increasing pile of fixed-income assets that offer them less than their original investment.
Moreover, the unusual condition of negative rates isn’t likely to resolve itself soon and could worsen.
After a double-shot of weaker-than-expected eurozone and U.S. purchasing-managers-index readings on Friday, buying in global government paper surged, sending the yields of well-developed government debt spiraling even lower.
Indeed, the 10-year German government bond /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -1.32% joined the Japanese 10-year bond yield /zigman2/quotes/211347248/realtime BX:TMBMKJP-10Y +0.99% in negative territory, while both slumped to their lowest levels since 2016, Tradeweb data show.
Bond prices rise as yields fall, and vice versa.
U.S. Treasury yields followed suit, with the 10-year benchmark rate falling around 8 basis points to 2.46% on Friday. The yield drop in the benchmark maturity briefly pushed it below the 3-month T-bill /zigman2/quotes/211347046/realtime BX:TMUBMUSD03M +2.72% , triggering a key recession indicator — a yield-curve inversion — that experts say reveals the extent of market anxieties centered on sluggish global growth seeping into the U.S. An inversion has been an accurate predictor of recessions and investors driving shorter-dated rates above their longer-term counterparts, which defines an inversion, implies that the market participants hold a dim view of the long-term economic outlook.
Against the backdrop of growing recession fears, stock markets tumbled Friday, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.08% the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39% , and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -1.20% , all booking their worst daily declines since Jan. 3, according to FactSet data.
It is a dynamic of meager and negative yields that has fostered a greater appetite for risk taking, writes Alberto Gallo, portfolio manager at Algebris Investments.
Gallo exemplified this best, noting in a Friday tweet that one would need to invest €10 million ($11.32 million) in 30-year German government bonds /zigman2/quotes/211347116/realtime BX:TMBMKDE-30Y -1.67% to earn an annual income of €60,000, highlighting that investors were poorly compensated even when they bought comparatively higher-yielding, longer-dated maturities. The 30-year German bond yield trades at 0.60%, less than 2 percentage points below its equivalent American peer.