Currently, bonds worth around $5 trillion are trading with negative yields, but research from Aeon Investments, the London-based credit-focused investment company, suggests the situation will change substantially over the next 12 months with the dismantling of pandemic-era monetary policy.
Aeon employs a relative value fixed-income strategy and specializes in structured credit in segments that offer competitive returns on a risk-adjusted basis, specifically in the real estate, infrastructure, transportation, and private debt sectors.
Aeon Investments commissioned research (1) with pension funds and other institutional investors in Europe and the US who collectively have around $435 billion in assets under management has shown that 27% believe that by October, under 10% of global fixed income will still be in negative-yielding territory with a further 21% believing that between 10% and 15% of bonds will have negative yields.
Oumar Diallo, Chief Executive officer, Aeon Investments, said: “With the unprecedented levels of monetary support provided by central banks driving interest rates to record lows, investors have had to endure very low yields in the fixed income markets with Japan and most EU countries making up the bulk of negative-yielding issuance.
The issue of negative yields is largely a result of the steps taken by central banks to support financial markets during the pandemic, namely, cutting interest rates and the huge asset purchase stimulus programs.
However, bonds have fallen recently as central banks have increasingly signaled their determination to unwind the measures taken over the pandemic, particularly with the inflationary pressures looking less transitory than initially predicted.
One consequence of low bond yields is that we have seen growing interest in structured credit investment vehicles focusing on transportation, infrastructure, real estate, and private debt that can deliver robust income streams whilst having a strong focus on capital preservation and lower correlation to risk assets. We expect this trend to continue, even as we expect bond yields to improve.”
(1) Aeon Investments commissioned the market research company Pureprofile to interview 100 institutional investors across the US, UK, Switzerland, Sweden, Norway, The Netherlands, Germany, Finland and Denmark. The survey was conducted online in October and November 2021.
