Article / 07 July 2016 at 10:43 GMT

Government bond yields dive further into record territory

Fixed Income trader / Saxo Bank
  • 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. 

• UK gilt 10-year and 30-year yields reached new all-time lows at 0.72% and 1.74%   respectively, as the Brexit fallout weighs on the domestic economy.

• 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.

 Source: Saxo Bank

— Edited by Martin O'Rourke

Michael Boye is on Saxo Bank's fixed income desk


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