Fixed Income Update – Global Bond Markets

  July 8, 2016

The Fed is ready for a rate increase this summer as comments made by Fed officials in May validated their confidence in the economy’s growth and rising inflationary pressures.

Low to negative bond yields in Europe and Japan are costing bond investors billions. Fitch, a bond rating agency, released a statement in May detailing how negative yields impact investors. It estimates that there is roughly $10 trillion of negative yielding debt worldwide, in turn costing investors about $24 billion annually. With the average negative yield being -0.24% on $10 trillion, it costs bond investors $24 billion annually. Conversely, the average yield on the same bonds five years ago were 1.23%, producing $123 billion annually. The ultra low yields are primarily impacting pension funds holding negative yielding debt because the returns earned help pay down any pension liabilities. Lower yields are also influencing investors to shift to higher yielding and more volatile bonds.

Some similarities between Greece and Puerto Rico emerged in May, as Puerto Rico received a form of debt relief for about $120 billion of bonds coming due this month. The House and Senate reached a deal that would give the U.S. Territory of Puerto Rico the ability to forgo paying on some of its debt as well as not impose U.S. minimum wage rates for residents under 25. Puerto Rico has already defaulted on several of its bond payments due in May. A declining economy and migration of citizens out of the country have led to the current circumstances.

Sources: Fitch, Eurostat, Bloomberg

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