By Sunny Oh
Fixed-income buyers would need to invest EUR10 million ($11.32
million) in 30-year German government bonds to earn an annual
income of EUR60,000,
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
(http://www.marketwatch.com/story/amount-of-global-debt-yielding-less-than-0-approaching-10-trillion-2019-03-22)
that the total amount of negative-yielding debt in bond issues
represented in the Bloomberg Barclays Global Aggregate Bond Index
(AGG) 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 joined the Japanese
10-year bond yield 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, 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.
Read: The yield curve inverted -- here are 5 things investors
need to know
(http://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22)
Against the backdrop of growing recession fears, stock markets
tumbled Friday, with the Dow Jones Industrial Average the S&P
500 index , and the Nasdaq Composite Index , all booking their
worst daily declines since Jan. 3
(http://www.marketwatch.com/story/stock-futures-point-lower-after-europe-data-underlines-growth-worries-2019-03-22),
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 EUR10 million ($11.32 million) in 30-year
German government bonds to earn an annual income of EUR60,000,
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.
(https://twitter.com/macrocredit/status/1109026921298440193)
See: Amount of global debt yielding less than 0% approaching $10
trillion
(http://www.marketwatch.com/story/amount-of-global-debt-yielding-less-than-0-approaching-10-trillion-2019-03-22)
Strategists and traders say many yield-hungry investors in Japan
and Europe could either look beyond low-yielding, and sometimes
negative-yielding government bonds, to buy corporate bonds and
arcane forms of debt such as collateralized-loan obligations, also
known as CLOs.
Other options
However, market participants said there may still be good
options in fixed-income, including European corporate debt, that
don't sharply and unduly ratchet up risk.
"Today's environment calls for diversification into alternatives
and into credit risks which may represent a better source of yield
than sovereign credit," wrote Gallo in a Monday research note.
"A prolonged environment of loose policy which will help to
reduce tail risks for the cycle, but without fixing structural
economic issues," he said, referring to easy-money monetary
policies currently being espoused by the Federal Reserve and the
European Central Bank, which have both downgraded their
expectations for regional economic expansion and dialed back
earlier plans to normalize crisis-era policies.
Commerzbank's Stoeckle said that "despite all the real and
potential damage slowing growth and trade conflicts might create in
the corporate space, investors are increasingly pushing back into"
euro-denominated investment-grade and sub-investment grade
corporate bonds."
Aza Teuween, a portfolio manager for TwentyFour Asset
Management, told MarketWatch that European corporate debt dynamics
remain healthy because a number of companies had refinanced their
debt at, or near, zero in 2016, meaning their interest costs remain
muted, lowering a likelihood of default.
"Many companies don't have need for a refinancing right now, a
lot of the loan maturities in Europe are pushed to 2023 and 2024.
Because spreads were so tight in 2016, every company that could
refinance has refinanced. With healthy interest-coverage ratios,
its difficult to see that default rate pick up," Teuween said.
And corporate bond buyers could still benefit from further price
appreciation.
Corporate credit spreads, the extra yield investors demand to be
compensated for buying riskier debt over safer government paper,
still remain relatively benign compared with the first half of
2018, before a combination of anxiety around Britain's negotiations
to exit from the European Union and upheaval in Italian politics
sent tremors across eurozone corporate credit markets. When the
price of a corporate bond rises, its yield will fall and compress
its credit spread.
However, U.S. debt may still hold that greatest appeal for
investors, even with Friday's yield slide.
"There's much less of a reason to go outside," Ed Al-Hussainy,
senior rates and currencies analyst at Columbia Threadneedle, told
MarketWatch.
GDP and flurry of housing data ahead
Looking ahead, investors will watch for a final update of the
fourth-quarter gross domestic product data due Thursday at 8:30
a.m. Eastern Time, which may be more closely watched amid growth
worries.
On the housing front, Tuesday will see a February report on
housing starts, building permits at 8:30 a.m., and the closely
followed Case-Shiller home price index at 9 a.m., while on
Thursday, a February report on pending home sales is due at 10
a.m.
Meanwhile, a report on current-account deficit and trade are due
at 8:30 a.m. on Wednesday.
(END) Dow Jones Newswires
March 23, 2019 10:12 ET (14:12 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.