The scramble for real income could prove to be a decisive force in markets
Save time by listening to our audio articles as you multitaskLess than three years ago, as much as 40% of global government debt offered negative yields. Today that share has fallen below 10%. Much of it is concentrated in very short-term European and Japanese debt, the first of which is not long for this world, if market expectations for interest-rate rises in the euro area are to be believed.
Negative yields brought fewer shifts to investors’ habits than was feared in 2016, when oil prices tumbled and German and Japanese ten-year bond yields first dipped below zero. Conservative investors—reserve managers and pension funds, say, with tens of trillions of dollars to deploy—still bought bonds. Mass hoarding of physical cash, which offers a nominal interest rate of zero, did not come to pass.
The situation in the euro zone is even more extreme. The real yields on long-dated government bonds are far lower than they were during the height of the deflationary panic. A German inflation-linked bond maturing in 2046 now offers a yield of -1.6%, compared with -0.8% in mid-2016. A modest increase in expectations for interest rates has been swamped by the bigger jump in expected inflation.
Some assets, such as American high-yield corporate bonds and some emerging-market corporate debt, benefited when investors first searched for yield. The recent change in financial conditions complicates the outlook for them. High-yield bonds, for example, are more likely to offer positive real yields. But rising interest rates and the higher possibility of recession make those assets riskier, too.
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