With Japan and Europe central banks increasing their debt purchasing programs, global demand for fixed-income assets is set to outpace supply next year, potentially supporting the fixed-income market and keeping U.S. bond exchange traded funds as an attractive option for yield generation.
According to JPMorgan Chase & Co. data, central banks in U.S., Europe, Japan and the United Kingdom, along with other major lends and reserve managers in those regions, are expected to hold $26 trillion of debt securities by the end of next year, reports Susanne Walker for Bloomberg.
“Because of the incremental buying from central banks, there’s really not been much supply hitting the market,” George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., said in the article.
Consequently, demand for debt securities could surpass issuance by $400 billion in 2015. The supply and demand disparity may have helped push global bond yields to a record low 1.51% in October – average global yields hovered around 1.61% last week, compared to 3.5% at the end of 2008.
The rising global demand for bonds and persistent low-yield environment overseas could also push foreign investors to U.S. assets for the attractive yields. For instance, intermediate U.S. government bond ETFs, including iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR) and Vanguard Intermediate-Term Government Bond ETF (NYSEArca: VGIT), have a 2.07% 30-day SEC yield, 1.48% 30-day SEC yield and 1.56% 30-day SEC yield. Meanwhile, the 10-year Treasury note yield is 2.31%.
In contrast, the benchmark 10-year Japanese Government Bond yield is 0.45% while the 10-year German Bund yield is 0.78%. German, Italian and French government bond yields have touched record lows this year.
Fixed-income investors may also find attractive yields in investment-grade U.S. corporate debt ETFs. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has a 3.15% 30-day SEC yield and Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has a 3.13% 30-day SEC yield.