Bond yields continue to suffer as interest rates around the world remain at near-record lows. According to a recent report by credit rating agency Fitch – which rates bonds and other credit held by government and corporations – “steep declines in global sovereign bond yields over the past few years have drastically reduced investors’ ability to generate interest income from new securities purchases.”
The ratings – which are used as a guide to price these debt instruments in the open market – are currently leading to big losses for corporations invested in sovereign bonds, including insurance companies and pension funds. But these declines are also bad news for individual bond investors, who have seen income from these investments decline over the last several years. These income-dependent institutions are likely to face increasing credit risk as yields on high-grade bonds diminish.
Putting These Losses into Perspective
According to Fitch analysts, compared to yields available in 2011, global investors are missing out on $500-billion in annual income on $38-trillion in currently outstanding bonds. As well, the median 10-year yield for the countries in Fitch’s study dropped from 3.87 per cent in July 2011 to 1.17 per cent in July 2016.
So what’s next for government bonds and the global bond markets? As bond yields drop, it makes it easier for governments to create stimulus for the economy, as it is cheap for them to do so. Over time, Fitch says the decline in bond yields has the potential to lead more governments to pivot to fiscal stimulus as a tool to boost economic growth.
Germany and Japan are going a step further and have started selling bonds at negative yields. Effectively this means, they are being paid by investors to park their money in a bond for a certain period of time. This can lead to a country digging themselves into deeper sovereign debt that can be difficult to deal with if the economy doesn’t see a pick up.
Experts say generally when bond prices rise and yields fall, it can signal the start of a recession. But in this case, the current low interest rate environment could will investors to invest for longer terms if it guarantees some yield in the end.
Fitch says Look Elsewhere
Fitch has also reported that bond investors’ global search for yield is leading them to look elsewhere for income.
All eyes are now on the US Federal Reserve, which is hinting at a rate hike by the end of this year or in early 2017. According to the key outlook from a research team on Investing Haven, analysts say the bond market will be centre stage next year, and will be the primary driver of the markets. Rising rates would be good for currency values, but could stall efforts by individual nations to stimulate their economy.
In domestic news, there are rumours the Canada Savings Bonds program may be scrapped. As yields have declined, the once-popular savings tool has fallen out of favour. In 1987, the value of bonds under the program was $55-billion in 1987, but by 2015 it had fallen to just over $6-billion. As well, a 2015 review by KPMG for the Department of Finance found it was costing Ottawa $58-million a year and there was “no valid economic rationale” for the program.
Finance minister Bill Morneau is now mulling over the idea of ending the program in the next Federal Budget, which is just another indication of how low yields are affecting people’s ability to find safe investments in Canada and around the world.