Even more of the global bond market will fall into negative yield territory, galvanizing the intense search for positive returns. The implication is that the traditional framework for projecting relative returns across sovereign bond markets based on the economic and policy outlook has been greatly diminished for the time being. Bond investing has come down to a blind, desperate search for income.
Eurozone bonds outperformed Treasurys and the global hedged benchmark overall on the announcement of the ECB’s QE program. However, we still believe that ECB asset purchases will favor higher-yielding bonds outside the Eurozone more than it will favor Bunds. As negative nominal yields extend out the Bund curve, investors will be under increasing pressure to flee financial repression. Thus, there will be pressure for long-term global yields to converge toward a low level, independent of the relative economic dynamics.
Following this logic, last week our Global fixed income strategists upgraded Treasurys and Canadian bonds to overweight at the expense of Eurozone bonds, which was moved to underweight. Gilts were left at overweight versus the global hedged bond benchmark. The table above highlights that the U.S. market is a relatively high-yielder in currency-hedged terms. The European periphery, gilts and, to a lesser extent, Canadian bonds also stand out.
In unhedged terms, the U.S. 10-year bond is even more attractive, given its high yield and positive dollar trends.