Two decades ago, well over half of the global bond market boasted yields of at least 5%, according to ICE Data Indices. The post-crisis splurge of central bank bond buying and rate cuts lowered this to under 16% a decade ago, but investors could still find plenty of higher yielding debt. Today, a mere 3% of the global bond market yields more than 5% — the lowest share on record.
Indeed, truly high-yielding debt is now almost an endangered species. Bonds with yields of more than 10% amount to just 0.4% of the global fixed income universe, according to ICE.
Negative interest rates in Japan and the eurozone, and mounting expectations that the US Federal Reserve will follow last month’s rate cut with several more this year, have expanded the pool of bonds with sub-zero yields to more than $16tn — or around 27% of the global bond market.
This is primarily a European phenomenon. While US bonds account for just under half the $55tn global investment-grade bond market, they pay out 88% of all yield, according to Bank of America.
There are, broadly speaking, two main ways for investors to counteract the global yield drought: buying longer maturity or riskier debt. But hunger for long-term bonds from investors such as pension funds and insurers means that the yield pick-up one would normally expect to receive through buying bonds maturing decades into the future, has also fallen sharply.
That leaves many investors pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments.