Global Interest Rates Still Low:
What Can Fixed Income Investors Expect?
Since the Global Financial Crisis (GFC), central banks around the world have used a variety of monetary policy tools to bring down interest rates and stimulate economies. But even 10 years post-crisis, many developed countries still have government bond yields that are historically low.
It is our expectation that fixed income investors are likely to experience low returns on developed market debt for the near future.
As the chart above shows, low and negative yielding debt dominates in many developed countries and particularly in Europe. Currently, an overwhelming portion of European sovereign developed debt yields less than 1%. Of that, a significant portion of that debt yields even less than zero. The number of countries and corresponding tenors with negative yields are indicated by the red boxes in the chart. Most of Germany’s government debt yields less than 1%, as does the debt of Netherlands and Finland.
The European Central Bank’s quantitative easing program, or “QE” program, was started as an attempt to stimulate Eurozone economies that had been hit by the GFC. Through this QE program, the ECB has been buying up government bonds as a way to drive investors toward risk assets.
The ECB began its QE program in 2009 on a somewhat limited basis, but started to scale it up dramatically in 2015. In the last year or so, economic growth in the Eurozone has finally shown signs of picking up on a sustainable basis, with manufacturing data and GDP growth trending higher. This pickup in growth is behind ECB chair Mario Draghi’s recent statements about the ECB possibly pulling back its stimulus program. No timetable has been set for unwinding stimulus, though, and QE continues, pushing bond yields down.
Japan’s government bonds have also been pushed to low yields by QE. As the chart shows, bonds at every point on Japan’s yield curve are yielding less than 1%. The Bank of Japan continues its monetary stimulus, which began in earnest in 2010, even as growth numbers in Japan have been relatively strong in 2017. This means that low yields can continue to be expected on Japanese government bonds.
In the U.S., as the Fed continues to raise rates back to normalized levels, this will serve as a strong headwind to domestic fixed income, and especially to Treasurys. Relative to the rest of the world (excluding Australia), U.S. rates across the term structure look much more favorable than European government bonds do.
While global bonds serve as a strong complement and diversifier for a traditional fixed income portfolio, the low/negative interest rate environment globally will continue to mute overall returns for sovereign global bonds. And while the ECB has talked about beginning to unwind their stimulus programs, no timetable has been presented just yet.
With that in mind, investors should not expect to see yields in developed market bonds coming up much higher in the near future and developed bonds may be challenged as central banks work to normalize rate levels in the future. We continue to recommend that investors consider broadening the level of diversification in their fixed income allocations and adjust expectations for returns from sovereign debt.