What negative bond yields mean for investors

05 December 2019 | Markets and Economy


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The value of global bonds with negative yields stood at $13.4 trillion at the end of October, having risen as high as $17 trillion a few months earlier. That means investors around the world have been willing to pay a premium to corporations or countries for the privilege of lending them money.

This strange turn of events is part of a trend in which government bonds across much of the developed world yield less than 2%.

Although prospects for bond returns have dimmed as yields have fallen, it's important to remember the role that bonds play in a portfolio, Vanguard experts Paul Jakubowski and Alexis Gray note.

Government bond yields' steady downward trend (%)

Sources: Vanguard, using Bloomberg monthly data for 10-year government bond yields for October 2009 through October 2019.


A quick look at how we got here

Since the global financial crisis, central banks have cut their targets for short-term interest rates, seeking to make borrowing cheap in the hope that consumers and businesses would boost economic growth by buying cars, taking trips, hiring more workers, or investing in equipment. These short-term rate cuts can weigh on longer-term yields as well when investors interpret them as a sign that policymakers are worried about the economy's health.

Investors buying bonds in anticipation of even lower yields have also played a role. After all, bond prices rise when yields fall. So even bonds with negative yields can generate positive returns. “To realise a positive return, an investor must opportunistically sell the bonds prior to maturity, which may not be desirable or feasible for some investors,” said Mr. Jakubowski, Vanguard's head of global fixed income indexing.

Fear has also driven yields lower, said Ms. Gray, a Vanguard senior economist. Some risk-averse investors—worried about the prospects of an economic slowdown or lofty stock valuations, for example—have chosen bonds' near-zero returns over the risk of a significant stock market downturn of 10%, 20%, or even more.

Where yields might go, and what investors should consider

Yields are already low, but uncertainty about global growth and trade tensions in particular could well result in further easing by central banks. So it's a difficult call. Yields could rise and normalise—or continue to go lower.

Because yields are a good proxy for bonds' potential annualised rate of income, the bond environment is likely to remain challenging. Mr. Jakubowski and Ms. Gray offer some tips on how to navigate it:

  • Diversify globally. Negative yields in some markets shouldn't deter investors from holding a global bond allocation. “If the exposure is hedged, the income return along with the resulting hedge return tends to produce total returns in line with those of local bonds but still offer the benefits of diversification,” Mr. Jakubowski said.
  • Be realistic. Base your financial goals—such as sending your children to college or providing for your retirement—on realistic return expectations, Mr. Jakubowski cautioned. Starting to save if you haven't already, saving slightly more of your pay every month, or extending your time horizon by, for example, planning to work a little longer are all more reliable ways of meeting those goals than counting on a hoped for level of market returns.
  • Keep an eye on costs. All else being equal, the lower the cost of an investment, the greater the return investors keep for themselves. By simply keeping costs low, you can boost income without an increase in portfolio risk.

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.


Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). Not to be distributed to the public. It is for informational purposes only and is not a recommendation or solicitation to buy or sell investments.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The opinions expressed in this article are those of the author and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2019 Vanguard Asset Management, Limited. All rights reserved.


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