07 July 2016 at 10:43 GMT
- US Treasuries 10- and 30-year bonds at all-time lows
- German 10-year bunds dive deeper into negative territory
- Brexit fallout sends UK gilts to record lows
- Danish 10-year bonds also into negative territory for first time ever
Government bond yields are delving ever further
down with some below the zero line. Photo: iStock
By Michael Boye
Government bond yields continued their descent into record territory across developed markets. This week has seen several new landmarks reached, including:
• US Treasury 10-year and 30-year yields reached new all-time lows at 1.32% and 2.10% respectively, reflecting the complete withdrawal of rate-hike expectations.
• Germany’s Bund 10-year yield dropped to minus 0.20% and the sovereign yield curve is now negative out to 2031.
• Denmark became the latest member of the “10-year negative-yield club” as the 2025 bond changed hands with a negative yield for the first time ever.
So as markets continue to price in a Federal Reserve on the retreat and new aggressive moves from the Bank of England as well as the European Central Bank, there is obviously huge implications for investors:
Financials suffer heavily as pension funds will find it ever more difficult to fund long-duration liabilities and bank earnings see additional downward pressure from the margin squeeze.
Furthermore, the “zero-yield alternatives”, such as gold and bank deposits, are getting relatively more attractive, adding further pressure on the banking system. These instruments could eventually even replace government bonds as risk-free assets and low correlation investments for portfolio optimization investors.
Finally, investor demand for risk assets and higher yielding bonds, such as emerging-market bonds, will stay strong, as investors chase each other further out the risk curve to improve (expected) returns.
— Edited by Martin O'Rourke