(Bloomberg) -- Whether you call it “Japanification,” a dash for safety or a bet on the Fed’s new normal, bond bulls are charging into some of the most notorious corners of developed debt markets.
As benchmark Treasury yields trade at December 2017 lows and those on German bunds sink deeper into negative territory, century bonds riddled with interest-rate risk are suddenly one of the market’s biggest outperformers. And the market of the world’s investment-grade and high-yield bonds has jumped by almost $1.6 trillion to $55 trillion in the past three weeks, with the index racing toward record highs, according to Bloomberg data.
Investors have vanquished their rate fears and now see central banks spoon-feeding returns through the rest of the credit cycle as the Treasury yield curve flashes recession fears.
“Fixed income has gone mad,’’ said Rishi Mishra, an analyst at Futures First. “It really is a mad search for quality.’’
Take negative-yielding debt. Often cast as the poster child for financial repression, it’s in line for gains as inflation goes AWOL. If anything, the concern is that with price pressures so muted and growth so weak, yields can keep falling and locking in rates now may pay off.
Federal Reserve Chairman Jerome Powell certainly emboldened the lowflation case last week when he said global risks are weighing on the economic outlook and that tighter policy can wait after slashing projected interest-rate increases this year to zero from two.
“Negative yields reflect low growth and subdued inflation,’’ said Ben Emons, the managing director of global macro strategy at Medley Global Advisors. “They have been relatively consistent in predicting such an environment whereas positive yields have fluctuated on expecting higher growth -- only to find out such high growth lasts just two quarters.’’
Austria’s bonds due 2117 have delivered a total return of about 15 percent this year as investors shrugged off the inherent uncertainty of casting bets one hundred years into the future. German 30-year bonds yielding a paltry 54 basis points are up 7.7 percent, trouncing juicier junk bonds and emerging markets.
For now, the search for yield has swept up corporate debt markets too, even though company balance sheets would be hit in an economic slowdown that would impinge on their abilities to service large debt loads.
“It seems that there is widespread capitulation on strong macro views, so the search for carry is on,’’ said Chris Iggo, chief investment officer for fixed income at Axa Investment.
The $9.8 trillion Bloomberg Barclays Global Aggregate Corporate Index is fast recovering from last year’s meltdown, yielding less than 125 basis points above Treasuries -- below the five-year average.
“Credit should not do well when the yield curve is inverted and recession fears heighten,” Emons wrote in a separate note. “Yet, inverted yield curves, recession and rate cut expectations has driven credit spreads tighter.”
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