Falling Bond Yields a Positive for the US

By: John Adam
John Adam
John Adam was one of the Invezz Founding Partners & Lead Editor's up until 2017. John has an unmatched… read more.
on Jul 4, 2016

The global economy is sputtering along, and investors are running out of places to invest. Combine this with massive stimulus measures across the world, especially in Europe and Japan, and you have a recipe for low bond yields. Now many investors are worried that bonds are no longer a viable investment option because of relatively low yields. However, low bond yields globally may present a major opportunity for the US.

The European Union has been using a massive bond buying program to prop up its waning economy, which has sent bond yields down to record lows. Japan is facing a similar situation with stagnant economic growth, massive stimulus measures, and incredibly low bond yields. Add to that the recent statements of Bank of England Governor Mark Carney and his intent to slash rates and begin asset purchases should Britain need it, and global bonds appear to be facing a period of prolonged low yields.

Even the US is confronted with a similar situation. The yield on 10-year US Treasury notes recently fell to 1.385 percent, a record low, before recovering later in the day. US investors themselves are worried about these low yields, but international investors may see this as a major opportunity. Although yields on both corporate and government bonds in the US are also falling, they are far more appealing to international investors compared to incredibly low yield investments in Europe and Japan. Analysts at Bank of America have pointed out this trend, noting that US corporate bonds are 12 percent of investment-grade bonds across the world. However, they also account for one-third of all investment-grade income due to relatively more appealing yields.
US corporate debt, in particular, is gaining in popularity. Bank of America also notes that the average yield on medium to long-term corporate bonds floats around 3.19 percent. Recently the European Central Bank has included corporate bonds as part of its monetary stimulus, which may give international investors even more incentive to purchase US corporate debt. The combination of stagnant economic growth and low bond yields globally makes the US seem like a much safer and lucrative investment compared to any other major region. US bond yields may be falling, but they remain higher compared to similar assets elsewhere. Although falling yields are not desirable to US investors, the benefits of increased corporate funding will likely benefit the economy to a significant extent.
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