Seek yield alternatives amid yield compression
The US Treasury (UST) 10-year yield has declined a significant 65 bps since the start of the year to 2.10% (as of 17 June). This comes on the back of increased expectations of Federal Reserve rate cuts over the coming 18 months, driven by renewed fears of a slowdown and heightened risks from trade tensions. Current futures prices reflect 65 bps of expected easing in 2019 and an additional 30 bps of easing in 2020. This implies markets are pricing in four rate cuts by end-2020. Our economists, however, see two rate cuts in 2019 and none in 2020.
Global investment grade (IG) bond yields have, likewise, compressed significantly, across the various rating buckets.
- 22% of the global IG space is now negative-yielding, topping almost USD12t in value.
- Half of the IG space is now made up by bonds yielding <2%.
- Bonds yielding >4% now make up only 5.6% of the entire global IG universe, compared to 87% in 2000.
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