With U.S. economic readings coming out on the soft side and many investors believing the Fed to be in no rush to raise rates, U.S. yields have pulled back in recent weeks. The 10-year Treasury yield has retreated back to 2%. Still, this looks generous compared to Europe, where 10-year German Bund yields reached a new all-time low of 0.28% and seven-year yields moved below zero for the first time. Even in Greece, yields are falling as the odds of a near-term Greek exit from the Eurozone dropped.
Market Realist – Yields are low across the globe.
Europe (EZU) and Japan (EWJ) have yields at near-zero levels. The US looks comparatively better with ten-year Treasury yields (IEF)(TLT) hovering around 2%. However, this is still much lower than the historical averages. You can see this in the previous graph. The robust US economy, along with political and economic uncertainty in other parts of the world, caused investors to climb into US fixed income instruments. This put downward pressure on yields.
European yields falling on account of soon-to-commence QE
European yields are being driven lower by the ECB’s (European Central Bank) recent announcement. The announcement marked the beginning of sovereign bond purchases as part of its 1.1 trillion euro stimulus. Mario Draghi announced that the ECB would commence purchases on March 9, 2014. The purchases would include negative debt-yielding instruments. Also, the Fed is contemplating a hike in interest rates for the for the first time since 2006. According to Bloomberg, the ECB’s announcement pushed the spreads between German bunds and ten-year US Treasury yields to 177 basis points—the highest in over 25 years.
The previous graph shows the yields from Japanese ten-year government bonds, German bunds, and US ten-year Treasuries.
Low rates in Europe are stimulating euro-denominated debt
The low-rate environment in Europe is benefiting corporates. They’re capitalizing on this opportunity by issuing corporate bonds in Europe. According to Dealogic, 26.6 billion euros of bonds from US borrowers have been issued in Europe this year. About one-third of this figure has been estimated to come from Coca-Cola’s (KO) $9.5 billion worth of bond sales last week. Mondelez (MDLZ) and Kellogg (K) also capitalized on the cheap debt available in Europe. Berkshire Hathaway (BRK) is contemplating a bond issue in the area.
Although the low yields are good for businesses in the areas, investors looking for income from bonds are in for a rough ride.