Government bonds are supposed to be among the safest, most secure investment vehicles around. However, an increasing volume of these bonds the world over are now yielding below zero, with that number hitting a record-setting $13 trillion worth of bonds at the end of June of this year.
At that time, both Austrian and French 10-year bonds entered negative territory.
Bonds with negative yields are investments guaranteed to be worth less than the bond’s principal amount if they are held until maturity. With more and more sources of potential income vanishing, foreign investors may be more likely to investigate other high-returning assets like corporate debt.
However, analysts agree the loss of returns could also drive them toward safe-haven assets like gold and precious metals.
Julien Scholnick, a fixed-income portfolio manager at Western Asset Management, said that his company will aim wherever higher yields appear to be an option. “Our bias is to fade those very negative-yielding markets and put more money to work in higher-yielding markets,” he said in late June.
There were certainly plenty of markets to steer clear from, with nearly a third of global government bonds trading with negative yields at the time.
Since the beginning of this year, U.S. high-yield assets had the best quarter since 2009 with returns of 7.3 percent. Emerging market debt had its best quarter since Q3 2012 with returns of 5.4 percent, and global equities rose nearly 11 percent in local currency terms.
JPMorganChase contributor Alex Dryden predicted risk assets were likely to stumble later in the year as investors became nervous over their investments but added these assets would likely start out strong.
However, Dryden continued, many investors appear to be willing to hold negative-yield bonds in this economic cycle, “particularly when the economic outlook begin to darken.” However, when the choice is low-yield or no-yield, low-yield appears pretty bright by comparison.
This could be good news in the United States since it appears bond yields will remain low but positive as interest rates remain low as well.
“Interest rates are generally going to be lower for longer. There are not a lot of catalysts we can think of for interest rates to move up meaningfully higher,” said fixed-income specialist Margaret Steinbach recently.
Not surprisingly, this has all been good news for investors already holding gold. Bloomberg commodities columnist David Fickling wrote at the end of June, “Gold may be finally off the leash.”