Bond yields are historically low, and that’s impacting every corner of the market.
To Peter Oppenheimer, a strategist at Goldman Sachs, the drop in bond yields is so intense it borders on fictional.
“Anyone linking 007 to a bond today might as easily be referring to the yield on government debt as to the synonymous fictional character,” wrote Oppenheimer in a note to clients.
“Not so long ago, the idea that bond yields, and yields in general, could fall to current levels would have seemed as big a fiction.”
On the surface, writes Oppenheimer, the bond decline has been caused by asset purchases as a part of quantitative easing (QE) programs from central banks. This has been connected to all of the key macro trends in markets that have been cropping up over recent years: the reach for yield, expanded price-to-earnings ratios in the stock market, negative yields, and so on.
There are some even finer impacts that show just how meaningful this drop in bond prices has been to the markets, according to Oppenheimer.
Here’s a smattering of the other ways the record low bond rates have affected markets:
- As bond yields have fallen, investors have favoured predictable companies. “The point about predictability also shows up in the increased benefits of stability,” wrote Oppenheimer. “In an uncertain world, with a wide trading range, investors are favouring companies that can display lower volatility than the market in general.”
- Lower bond yields have benefited consumer staples, but not financials. “By boosting the value of companies with decent top-line growth but squeezing net interest margins for banks, lower bond yields have increased the value of consumer staples while banks have de-rated,” said Oppenheimer.
- The US has become more desirable than the rest of the world. “It is less cyclical than Asia or Europe and has achieved better growth,” wrote Oppenheimer. “Just as defensive and growth areas of the market have done better than cyclicals and value, the US, which has more growth and less cyclicality, has outperformed.”
- Companies with large pension shortfalls have been hurt. “Higher bond yields would help these companies to recover,” said Oppenheimer.
So from investing styles to country-level stock market performance to retirement plans, the ripple effects of low bond yields have been significant.