Love it or hate it, our low-yield world looks set to stay. With geopolitical tensions and fears of a global slowdown uppermost in investors’ minds, the mountain of debt trading at negative yields has grown close to 30% since the start of the year and now stands at some US$13trn.1
This cuts both ways. On the one hand, countries with reserve or quasi-reserve currencies can borrow for virtually nothing. Witness the UK, for example, where the decision to go ahead with a second high speed rail network comes with the ability to issue debt at virtually zero cost.
Japan has rolled over debt for decades – again at little cost and without any real consequences. The US is running historically high deficits, yet yields remain at historic lows.
Even Greece, hardly a watchword for fiscal responsibility, now has bonds trading at levels barely above zero.
But cheap money has its drawbacks too. In credit markets, it has created an army of zombie companies essentially on life support, able to roll over debt practically for free. Defaults are becoming a rarity and the lack of penalty for fiscal profligacy or bad management means the breakdown of traditional risk/reward mechanisms. Now more than ever, investors trying to understand the true cost of risk have their work cut out for them.
Jon Day, global bond portfolio manager, Newton Investment Management.
1 Source: Bloomberg 20 February 2020.