The quest for positive yields


Equities remain the only game in town; investors should look at dividend-yielding equities as alternatives to bonds.
Chief Investment Office18 Jul 2019
Photo credit: AFP Photo


What happened?

What should we call High Yield (HY) bonds that have negative yields?

For the first time, negative yields have crept into corporate junk bond markets. Selected HY bonds are now starting to offer sub-zero yields in a space where investors traditionally hunt for higher yields in riskier companies.

In Europe, about 2% of the HY market offer negative yields, including bonds issued by tech-equipment company Nokia Corporation, telecom giant Altice France SA, and aluminum products manufacturer Constellium NV. The only way to make money from negative yielding bonds would be to hope that rates/yields go even more negative.

The amount of negative-yielding debt in the global Investment Grade (IG) space remains elevated at around USD13t, which is 23% of the global IG universe. (Figure 1).

These negative-yielding bonds also seemed to have compressed US Treasury (UST) term premium, distorting signals sent by the US yield curve (Figure 2) which, if true, could have reduced the reliability of the US yield curve as a recession predictor. The sum of negative-yielding bonds (both IG and HY) looks set to increase further, at least in the short term, as markets price in further monetary easing from G-3 central banks. That is true especially in Europe, where incoming European Central Bank (ECB) President Christine Lagarde – due to start 1 November – is expected to continue the central bank’s dovish policy.

Some interesting data to consider:

  • About half of sovereign debt from Japan and Europe, amounting to around USD5t in each market, are now negative yielding.
  • German government bonds with maturities of 15 years or shorter are all negative yielding.
  • Bonds of emerging Europe economies like Poland and Hungary are also starting to trade at sub-zero yields.
  • Austria’s century bond, which matures in 2217, now yields only 1.2%. This bond’s recent EUR1b extension tranche was five times oversubscribed.
  • US is the only G-3 country where none of its USD16t debt see negative yields.
  • HY bonds, notably EUR-denominated ones, have started to offer sub-zero yields since early-July.

Figure 1: Negative-yielding bonds’ proportion stays elevated, at 22%

Source: Bloomberg, DBS

Figure 2: Negative-yielding bonds seem to have distorted the US term premium

Source: Bloomberg, DBS

What does this mean?

With G-3 central banks looking to cut benchmark rates, the negative-yielding bond phenomenon looks set to stay. In the US, Fed futures are pricing in two rate cuts by the end of this year, and an additional two cuts in 2020. In Europe, the ECB’s dovish stance is expected to continue – at June’s meeting, current ECB President Mario Draghi suggested further rate cuts and new bond purchases should growth and inflation slow. In Japan, the Bank of Japan (BOJ) may be forced to consider more stimulus, especially if Federal Reserve’s rate cuts materialise thus strengthening JPY.

While the negative-yielding bond malaise has spread from IG to HY bonds, the consolation here is that the USD and SGD bond curves are still positive. The sectors we have been advocating since the start of the year – USD BBB/BB-rated corporate bonds, Singapore Real Estate Investment Trusts (SREITs), and the “big five” Chinese banks – have done relatively well on the back of the relentless hunt for yield. We also like them for their steady cash flows.

SREITs outperformed in the first half of the year, with yields and yield spreads compressing to 5.4% and 3.5%, respectively. These levels are no longer cheap. Yet if we consider the backdrop of negative-yielding bonds worldwide, the 5.4% yield offered by SREITs is attractive, being the highest among global REITs. In fact, we have seen increased interest in the SREITs sector from Japanese institutional investors who are seeking higher yields outside of their home market.

What should you do?

We advocate investors to stay on the quest for positive yields in USD BBB/BB-rated corporate bonds , SREITs, and the “big-five” Chinese banks.

Further, equities remain the only game in town; given the backdrop of growing negative-yielding bonds, dividend-yielding equities are also good alternatives to bonds. In view of the already negative benchmark government bond rates in Japan and Europe and further easing expected by all G-3 central banks, the phenomenon of negative-yielding bonds is set to stay, at least in the short term.

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.