Investors looking to add fixed income exposure face an unusual environment. The major developed nations’ markets are offering very low or even negative returns on government bonds. In today’s market, for example, the yield on the ten-year German bund is negative 0.1%. Similarly, the ten-year rate in Japan is negative 0.065%. Essentially, investors are willing to invest 100% to get back only 99+% because the need for certainty of principal exceeds the need for return on capital. In Europe, the ten-year rates are all lower than the equivalent U.S. rate except for markets in Greece and Italy. In the U.S., the ten-year rate is now 2.42% which is historically quite low. Importantly, none of these bond markets is suggesting an imminent return of inflation. The ultimate message seems to be that the global economies are growing slowly without a severe demand for funds that would begin to raise interest rates. Faced with these low rates, investors are looking at equities which helps explain why several major stock market indexes are trading at or near record levels. Central banks are supplying liquidity and the Federal Reserve has stepped back from its ‘hawkish’ stance of last November/December when it appeared to be raising short-term rates over the next several quarters. In the current environment, bond market investors face few attractive alternatives and patience is required. Capital looking for fixed income returns is best deployed in the short term market until the long term rates rise and become more attractive.
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