The yield on European high-yield bonds is not so high any more, compared to equities, according to Deutsche Bank’s Asset Management team. They explain that higher income can be obtained by investing in stocks:
Traditionally, investors have relied on fixed-income securities to generate income from regular coupon payments. Equities, by contrast, were meant to provide price gains, and to increase in value, with dividends only providing a little extra income.
But recently the situation has changed. Deutsche Asset Management highlights the “unprecedented decline in yields” which has fuelled large price gains in bonds.
Subsequently, even yields on high-yield bonds are below equity dividend yields. Our “Chart of the Week” demonstrates this development for European markets.
With regard to US bond yields, Axa Investment Managers flag that the Fed’s planned balance sheet reduction has to be the focus for the market there. QE tapering is slated to start in September. Chris Iggo, AXA Investment Managers CIO, says the Fed will only reduce its balance sheet slowly. But he makes the point that:
Over time it means a significant reversal in the ownership of Treasury debt away from the Fed and back towards the private sector – both domestically and internationally. Will higher yields be needed to persuade the private sector to increase its holdings of Treasury debt again?
Iggo says it “remains to be seen” who will buy the Treasuries the Fed is not buying when it unwinds its balance sheet. In his view:
It will be banks, insurance companies and pension funds to begin with. But they are not totally price insensitive. The change in the relative supply dynamics should still mean higher yields.
Fed chair Janet Yellen will speak about financial stability today at the Jackson Hole syposium. Analysts believe there could be some margin for her to provide a fresh indication about the timing of balance sheet normalisation.