Global Credit 4Q19: The hunt (for yield) continues

The sweet spot is in the BBB/BB basket
Chief Investment Office04 Nov 2019
Photo credit: AFP Photo

With 30% of the global aggregate bond market value now in negative-yielding territory, the insatiable hunger for yield continues. We see more value in the EM segment after recent widening of yield spreads, as opposed to the DM segment where yield spreads have tightened. Across the risk-rating spectrum, the sweet spot is in the BBB/BB basket where risk-adjusted value is the highest.

The amount of negative-yielding IG bonds has expanded to USD16.7t, or 30% of the global IG universe. The negative-yielding bond malaise in the global IG space has worsened, with the total amount climbing to USD16.7t from USD11.7t in 3Q19. This makes up 30% (from 22% in 3Q19) of the global IG universe – a record high. This phenomenon has also spread to the HY bonds space and selected EM countries. The surge in negative-yielding bonds undermines the “time value of money” principle – that money today is worth more than money in the future as one can earn interest on it. It remains to be seen how long and extended this unusual phenomenon can last. In the near term, however, given the renewed efforts by global central banks to ease monetary policies, the amount of negative-yielding bonds looks likely to increase further.

Significant compression in global IG bond universe. Over the years, we have seen the proportion of higher-yielding buckets decrease substantially in the IG space. For instance, the proportion of IG bonds yielding 4% or more has dropped to 2.5%. However, the proportion of negative-yielding bonds has ballooned from 17% at the start of 2019, to 30%.

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