The unprecedented chase for yield

By Sober Look

The major market surprise of 2014 so far has been the extent of investors’ appetite for yield in the developed fixed income markets. It has been quite spectacular. The Eurozone in particular has been a key beneficiary of this trend. We’ve seen German government bond yields hit a low not seen in almost a year (see Twitter post), but the real action has taken place in the periphery bonds. We are seeing multi-year and even all-time lows in government bond yields.

Spain Portugal Italy 10y yield

And this trend is not limited to sovereign paper. European corporate high yield bonds are now yielding  just over 3.6% on average – a record low. Let’s just put this in perspective – this is sub-investment-grade paper trading at these levels.

Euro high yield

While European fixed income markets clearly feel frothy, it is not clear if there is a near-term catalyst to bring about a correction. With the Eurozone inflation still MIA, capital seems to be chasing anything with a reasonable yield. The shift in attitudes from just two years ago is unprecedented.

Bloomberg: – “We’re still in a world where investors are starved of return,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “People are still happy to diversify their holdings and buy bonds that not so long ago they would have shied away from. The slightly better data helps reassure people that finally some of these weaker countries are turning a corner.”

 

 

Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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Comments

  1. No worries mate!

    The CBs of the world have your back and won’t let junk bond rates rise too much. But one wonders just how much in notational value it would take to cause a few cracks to appear in that market.

    When high yield spreads are getting compressed it feels like there is plenty of liquidity and tons of bids, but that is likely just an illusion. It’s one thing to buy a US Treasury note/bond after a brief sell-off, but who buys junk bonds if they turn around and rates start unwinding?

  2. Chasing for yeld is ALWAYS fatal. Investing in a subpar 10y yelding less than 3% is really crazy but not more than buying Amazon or FB or some biotech esoteric stock. Human behaviour is irrational most of the time. Expectations are mostly irrational not rational.

  3. I submit that it is quite rational to buy and hold 10-year US T-Notes at about 2.6% instead of owning government bonds issued by Spain, Italy, Portugal and other nations in peripheral Europe, as long as those T-Notes are held as part of a diversified, balanced portfolio. Look at Japan’s experience with its gov’t bonds over the past 20 years. Given that history, it is not out of the question that US T-bond yields could stay low for quite a long time, especially given our aging demographics.