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Where is the Yield?

9 August 2016 by Mark Holman

Reflecting upon the extraordinary events post-Brexit one thing is absolutely clear to us: yield is becoming ever more scarce, both in risk-free and risk-on assets. This trend in lower yields is a strong one and supported by an ever improving set of technicals as central banks become the new big buyers of credit assets.

Looking at the full universe of fixed income, the so-called MultiVerse Index, now has a yield of just 1.47% of which 69bp comes from spread (over the risk-free rate of UST). When we dig deeper into that index and look at the components which make up that yield, it gets more interesting. Gilts make up just 2% of the world’s yield, and Eurozone Treasuries, despite accounting for 17% of the volume, make up just 2% of the overall yield. Not surprisingly Japanese government bonds account for zero of the yield. It is easy to see how yield plus risk-off product is getting squeezed. The one part of the world where yield and risk-off still exists in size is in the US, but there is the uncertainty of the Fed and the risk of rising rates.

On the credit side of the equation, the story is similar. The € high yield market provides just 2% of the world’s yield, but with the yield on euro investment grade corporates notably under 1%, it is easy to see how € HY is getting squeezed by traditional investment grade buyers.

GBP markets have been even more vulnerable to a technical squeeze with the investment grade market contributing just 1% of the total yield and the HY market less than a percent of the outstanding volume. Should foreign buyers return to £ because they eventually think that £ is oversold and because yields are more attractive than in most parts of the world, then this little universe of yielding bonds could very quickly start looking like the € market.

Once again, if one wants to look for yield with plenty of capacity it is the US market, where US HY, despite accounting for just 4% of the multiverse index, accounts for 18% of the world’s yield.

We appreciate that the above is a lot of statistics for a summer morning read, however the message from us at TwentyFour is that if you happen to own yield and you are confident in the solvency of the borrowers, then hold on to it. Yield is going to become ever more scarce, especially if the Fed fails in its mission to raise rates.

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