Don’t be so negative: Finding value in US corporate bonds

As yields across the globe plummet, many investors are now actually paying someone to take their money. Currently, there are more than $12 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 rumored 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

Source: Bloomberg L.P., data as of June 28, 2019.

Figure 2
Bloomberg Barclays Global Aggregate Index – Yield generated by currency ($ billions)

Source: Bloomberg L.P., data as of June 28, 2019.

As the European Central Bank 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, fixed income traders expect (per the CME FedWatch Tool) the US Federal Reserve to cut interest rates by 25 to 50 basis points at its July meeting.

Summary 
At Invesco Fixed Income, 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 corporates to test 2016 lows.3

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.

Important information
Blog header image: Mick Haupt/Unsplash.com

A bund is a debt security issued by the German federal government. It is the German equivalent of a US Treasury bond.

The CME FedWatch Tool analyzes the probability of upcoming Fed rate moves, using 30-Day fed fund futures pricing data. Fed funds futures are financial contracts that represent the market’s opinion of where the fed funds rate will be at a specified point in the future.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Issuers of sovereign debt or the governmental authorities that control repayment may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of default. Without debt holder approval, some governmental debtors may be able to reschedule or restructure their debt payments or declare moratoria on payments.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

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