Bond investors chasing yield should look further afield to shake off the blues
- The ultra-low interest rates adopted to fight off global economic malaise have made government paper in developed markets less attractive
- Corporate credit and emerging market debt will have to be part of the playbook, and investors must do their homework to identify the companies and sectors that would do well in a pandemic
Bond investors are feeling blue these days. Bonds are supposed to provide a stable income and offset the volatility of buying stocks. But the crushing of global interest rates to zero has sapped bond yields, eroding their appeal. Put another way, fixed-income assets are providing little to no income.
Unfortunately, it seems pretty unlikely that the income payout on bonds is going to rise any time soon. Governments around the world are determined to nurse economies recovering from Covid-19 back to health. To do this, they’re deploying mass support like making the cost of money cheap. That’s helping the flow of credit in the economy, but it’s a disaster for savers who want income from safe investments.
Yet there is some hope, even in a yield-constrained world. The lagging recovery in service industries like travel and hospitality, in many parts of the world, will dampen any economic rebound.
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Global coronavirus cases pass 40 million mark as infection rates rebound in the US and Europe
Central banks may appear spent after a busy period propping up governments’ ability to spend, but they continue to show a willingness to do more to plug economic holes. Recently, central banks in New Zealand and England have tilted towards using negative rates, while further rate cuts and outright quantitative easing (central banks buying up the supply of bonds) is expected in Australia.
