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.
Alternatively, investors can capture the supply and demand imbalance and potential price appreciation in global bonds through international government bond ETFs, such as the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX), which has a 0.97% 30-day SEC yield, andiShares International Treasury Bond ETF (NYSEArca: IGOV), which has a 0.72% 30-day SEC yield. Both ETFs include large 20% exposures to Japan, along with Italy, France, Germany and U.K. [International Spice With a Treasury ETF]
Additionally, with another global economic slowdown and low inflationary pressure in developed economies, investors could continue to pick up bonds and temper rising yield expectations next year. [Foreign Investors Prop Up Treasury ETFs]
“It will keep global yields lower than they would be otherwise,” Chris Low, chief economist at FTN Financial, said in the article. The demand for bonds “reflects disappointing global growth and that’s been a consistent theme.”
Nikolaos Panigirtzoglou, a strategist at JPMorgan, even argues that the gap in demand will further depress yields next year.
“The environment of 2015 will be bullish for bonds,” Panigirtzoglou said in the article. “Market prices will move in a way that the gap will close. Yields will fall.”
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.