What in the World is Happening with Bonds?
"Making an investment that is guaranteed to lose money sounds like something that would cost you your job. But in bond markets, it has become a fact of life. Bonds worth US$17tn - roughly 30% of the debt issued by governments and companies around the world - are currently trading with negative yields. That means prices have risen to the point that investors are certain to get back less than they paid, via interest and principal, if they retain the bond to maturity. They are, in effect, paying someone to hold their money."
The above is the opening paragraph in a Mercer paper that highlights an unprecedented situation in global bond markets. READ FULL ARTICLE
Please read the complete article to see how Mercer arrive at the concluding paragraph below:
Conclusion: "To sum up, government and investment grade bonds retain a core role in client portfolios for their diversification benefits. Even at these low yields - and with lower prospective returns - bonds can act as ballast. They help offset the impact of equity sell-offs in an environment of rising macro uncertainty. Yet the cost of this protection is at historically high levels and the risk/reward trade-off is different on a near-term horizon. While reducing duration dials down interest rate risk, we still see an important role for long-term government and investment grade bonds as portfolio stabilisers, especially on a medium-term horizon."