Bonds, Bonds Everywhere and Not a Drop to Yield

The business district of Kigali, the capital of Rwanda Photograph by Jaco Wolmarans

Here’s this week’s mind-boggler of a stat: So voracious is the global appetite for debt that yields on almost $20 trillion of government securities are below 1 percent, according to Bank of America data.

Such little cost to borrow such an inconceivably large sum. These are at once generous and stingy times: If you are an economy or a corporation with any modicum of creditworthiness, your debt will get snapped up on low, long, easy terms. If you’re an investor, you have to hustle and dig for yield that you might think you can live with, and for a long time—at least well into an uncertain future.

The average yield to maturity for the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index fell to a record low 1.34 percent last week, compared to 3.28 percent five years ago, with the amount of bonds in the benchmark having since more than doubled, to $23 trillion. Again, tens of trillions are being bandied about here. With central banks in Washington, Europe, and Japan avowedly expansionary—flexing new tools to conjure up fresh tender to buy bonds—yields constantly hit up against a ceiling. Barclays predicts that central banks will buy $2.5 trillion of seemingly safe assets such as government securities this year, which is actually more than current net supply of $2 trillion.

Economies the world over are happy to cater to the ensuing need for yield. Rwanda, less than 20 years ago a failed, genocide-torn state, just raised $400 million from its first-ever foray into dollar bonds. The yield on the 10-year debt: a decidedly un-Third World 6.875 percent. Zambia, emboldened by its own $750 million sale last fall at just 5.625 percent, is now ready to offer as much as $1 billion in debt. Finance ministers of various other sub-Saharan nations are angling to place such historically easy bonds.

Meanwhile, the Dominican Republic just sold $1 billion of 5.875 percent dollar bonds. According to Bloomberg, the Czech Republic, Romania, Poland, Paraguay, and Mexico are also taking advantage of record-low lending terms. And forget Mongolia at your own peril—in November, it sold 10-year bonds that yielded a mere 5.125 percent.

Central banks of the West and Japan are doing these countries and corporations a major steady. Ask McDonald’s, which is planning to raise $500 million with a sale of 30-year bonds. It did this last year with a yield of just 3.7 percent. It’s not the fast food purveyor’s problem if buyers of that debt find themselves remorseful should double-digit interest rates return; just look at where they were three decades ago. Indeed, corporate bond yields fell to 3.15 percent on average on April 25, from almost 5 percent at the start of 2012, according to the Bank of America Merrill Lynch Global Corporate & High Yield Index.

Puny government bond yields are also helping the U.S. carry its debt load. On Monday, the government said that the Treasury Department is on track to pay off $35 billion of debt in the third fiscal quarter, its first such pay-down in six years. The Fed is buying $85 billion of Treasury and mortgage debt a month, having spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011.

Investors have (by design) consistently had nowhere to hide on the yield curve. Call it financial repression, says Shane Shepherd, the head of fixed income research for Research Affiliates in Newport Beach, Calif. He defines this as government policies that create an environment of low or negative real interest rates with the unstated intention of generating cheap funding for government spending.

“We should,” Shepherd wrote this week, “all be familiar with the effects of financial repression by now. If not, compare the declining amount of interest income coming out of your savings account to the rising costs you pay for groceries, gasoline, or (shield your eyes) college tuition. It has been nearly five years since we heard a loud THUD as the nominal yield of the short term U.S. Treasury note hit zero percent. The resulting negative real interest rates have become a pervasive feature of our economic landscape, and we expect them to persist for a very long time.”

And so the record bond run lives on. So far, at least, calling its end has been an exercise in regret.

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