Treasury yields continue to spiral downward as investors pour money into safe haven government debt in order to stem the tide as the stock market begins to show signs of weakness. The latest decline in yields may cause fixed income investors to wonder whether a scenario is possible where negative yields exist?
Per a Wall Street Journal report, there’s “more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.”
“We’re a bit perplexed about the level of yields,” said Andre Severino, head of global fixed income at Nikko Asset Management. “It’s kind of like Armageddon is being priced in.”
It’s something that the U.S. has largely avoided, but given the growing wall of worry in the global economy, that idea is not so far-fetched. In addition to trade wars, the protests occurring in Hong Kong are also putting markets on defense.
“If you proposed negative rates 10 years ago, people would have laughed you out of the room,” said Mark MacQueen, a bond manager and principal at Sage Advisory Services. “Today people are getting on board the negative-rate idea very quickly.”
It also doesn’t help yields when the central bank is pondering more potential rate cuts. The markets’ positive reaction to the recent rate cut by the Federal Reserve proved to be fleeting as volatility ensued when it wasn’t apparent that more rate cuts were on the way.
Instead, Fed Chair Jerome Powell said that the recent cut was more a “midcycle adjustment” versus a trend of more rate cuts to come. That being said, how can investors quench an appetite for yield?
One are is investment-grade corporate bond-focused fixed-income ETF options, such as the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
For more trends in fixed income, visit the Fixed Income Channel.