The world is again running low on yield.
Around $15 trillion in government debt globally now has negative yields, meaning investors are paying for the privilege of parking their money with a sovereign issuer. And while yields in the U.S. remain positive, they nosedived in the third quarter.
The yield on the benchmark 10-year U.S. Treasury note fell near all-time lows in early September before recovering slightly to end Friday at 1.678%. That is down from 2% at the end of the second quarter and around a full percentage point below where it stood at the end of 2018.
Short-term bond yields also are on a downward trajectory, even if they have at times in the third quarter surpassed those of longer-dated ones. That phenomenon, known as an inverted yield curve, is partly the result of two quarter-point cuts to short-term rates by the Federal Reserve in July and September.
Around a year ago, many investors believed the era of low yields was finally coming to an end. Yields on U.S. government debt stood at multiyear highs above 3%, deposit rates were rising and investors were expecting the European Central Bank to begin raising interest rates for the first time in years.
Those increases never materialized as slowing global growth forced global central banks to keep monetary policy loose. The environment has changed so much that many began to seriously debate if U.S. yields could hit zero, or even turn negative.
Now, investors are once again being forced to look farther afield for income and returns. In some cases, that requires them to face the unpleasant prospect of taking more risk or lowering their longer-term expectations.
At the same time, big gains in the stock market—the S&P 500 (.SPX) is up a little over 18% year-to-date as of Friday—have whetted investors’ appetite for the type of returns that, in most cases, are beyond the scope of most yield-bearing assets.
“That’s the world we’re living in now,” said James Bianco, head of Chicago-based advisory firm Bianco Research. “Two percent is now a big, fat yield. Most investors haven’t adjusted to that.”
Indeed, falling rates on ultrasafe products such as Treasurys have fueled interest in corners of the market investors may have once considered too risky or exotic.
That includes such products as high-risk municipal bonds—debt issued by borrowers such as charter schools, retirement communities and some companies backed by the taxing power of cities or states. Investors have piled a net $14 billion into these so-called junk munis through August—the most in any year going back to 1992—according to Refinitiv data, hoping to capture yields that average around 4%, compared with around 1.9% for investment-grade munis.
Meanwhile, investment-grade corporate bonds have sparked their own buying frenzy. In the U.S., they have notched a total return of roughly 13% so far this year, counting price changes and interest payments, according to Bloomberg Barclays data. The bonds pay holders an average of 2.9%—or a little more than half of what a six-month certificate of deposit paid in 2000.
Even emerging markets—where double-digit yields can still be found on some debt—aren’t what they used to be. JPMorgan’s Emerging Markets Bond Index, which blends yields from dozens of developing economies, shows a yield of 5.4%, compared with around 8.2% around 15 years ago. Many emerging-market central banks have had to cut rates alongside their developed-market peers to buffer their economies from trade-war shocks and slowing growth.
Preferred stocks and real-estate investment trusts are among the other assets that investors have piled into as global yields declined. Even gold, which yields nothing, has become a more attractive choice when compared with negative-yielding European or Japanese bonds. The precious metal, a popular haven during times of economic or political uncertainty, hit a six-year high in September.
Yet many worry that these investments have gotten too widely owned, making them vulnerable to sharp selloffs if central banks and governments finally succeed in boosting growth and spurring inflation. A small taste of that came in September, when Treasury yields roared back on easing worries over trade and better-than-expected U.S. economic data. Bond prices fall when yields rise.
Kent Engelke, managing director at Capitol Securities Management, worries that the vast amount of cash crowded into yield-bearing assets, combined with postcrisis regulation that has made it more difficult for institutions to trade, will stoke volatility if something sparks a rush for the exits.
“Who is going to step up and buy those bonds when an event happens? It keeps me up at night,” he said.
For now, some investors have taken solace in the hefty appreciation in their bond portfolios, as the securities’ underlying value has risen as yields have declined. The total return on longer-term Treasurys stands at around 24% in the past 12 months, according to Bloomberg Barclays, compared with 4.6% for the S&P 500.
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