Bond yields across the advanced world have touched a record low.
The fall comes as the US looks set to delay its next interest rate hike, the effects of quantitative easing and negative interest rates continue to take hold and political uncertainty mounts.
The yield on Bloomberg's global developed sovereign bond index dropped to 0.62 per cent – its lowest level since the index was compiled in 2010 as investors pour into the safe havens of government debt and the price of borrowing looks set to stay low for a while yet.
In the UK, bond yields are also down despite marked volatility in the value of the pound and referendum jitters stalking the stock markets. The yield on 10-year UK bonds is currently 1.26 per cent – down from 1.43 per cent last week. Investors in UK sovereign debt do not start to see a yield of more than two per cent until they get their hands on debt with a 30-year maturity.
In the Eurozone, yields are negative on all short and medium-term bonds. A 10-year loan pays just 0.08 per cent while a 30-year bond boasts a yield of 0.74 per cent – down from 0.9 per cent last week.
The yield field
|Country||Negative yields?||10-year maturity||30-year maturity|
|United Kingdom||No||1.27 per cent||2.11 per cent|
|United States||No||1.72 per cent||2.52 per cent|
|Eurozone||Up to and including five year bonds||0.08 per cent||0.74 per cent|
|Japan||Up to and including 10 year bonds||Minus 0.12 per cent||0.3 per cent|
With central banks' "insatiable appetite … to buy bonds", according to John Bilton, head of global multi-asset strategy at JP Morgan, yields are expected to stay low for some time.
Winners and losers
The classic 'winners' of low yields are those who are looking to borrow, while lower interest rates typically hurt savers and returns dwindle. It also poses big problems for any pensions schemes that have guaranteed some kind of payout – either corporate or public sector final salary schemes, for instance, or insurers that offered annuities based on higher annual returns.
"For companies, low yields are good news. For those who need cash, it's never been cheaper to borrow," Adam Laird, senior analyst at Hargreaves Lansdown said.
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Simon French, chief economist at Panmure Gordon added: "In the real economy, low yields are great news for borrowers with the prospect of even lower interest rates for mortgage-holders and businesses. The flip side is the bad news for savers for whom deposit rates are set to come under renewed pressure."
However, the picture is not as clear as just winners and losers. Laird added: "It's clear that this is having other impacts – like supporting the boom in stock buybacks and fuelling rising property prices."
Darren Ruane at Investec also said that the era of cheap money isn't spurring an investment boom as one might expect.
"Because growth and inflation have been low, people don't write have the confidence in the future to go out and borrow money … there isn't this huge demand for money you'd expect given low yields," he said.
With bonds being seen as a safe haven asset class by investors, periods of domestic uncertainty could weigh on the market. However, there appears to be little evidence that the EU referendum is distorting the market for UK government debt.
Referendum "risks don't seem to be weighing on the sterling bonds – at least not yet," said Laird.
French added: "UK sovereign bonds are highly unlikely to react to the EU referendum … The market for UK sovereign debt remains inoculated to political risk with the Bank of England continuing to invest its maturing asset base and investors seeing gilts as a safe haven."
Yields on medium and longer-term debt have come down in the UK over the past month even as the vote approaches. A one-year bond now has a yield of 0.34 per cent, compared to 0.43 per cent last week.
Even in the event of the UK voting to leave, the effects – for government borrowing costs – could balance out, as "bonds might be the least worst option," for domestic investors according to Laird, compared to expected volatility in foreign currency markets, equities and other asset classes.
Because the Bank of England may need to keep interest rate rises on hold – or cut them – after a vote to Leave, Ruane at Investec Wealth and Investment said bond yields in the UK could go even lower in the event of Brexit.