The chart below showing European investment-grade corporate bond yields, flagged up by FT Alphaville, is mind-bending.
The different-coloured bars correspond to how much European bonds have yielded (or the annual return investors can get) between 2012 and 2015. The height of the bar indicates the proportion. So for example, bonds that yielded up to 1.5% made up about 2-3% of the market in January 2012.
Notice how the chart has flipped. Bonds that yielded at least 2.5% were once the overwhelming majority of the group, making up nearly 70% in early 2012.
Now? Yields that high make up less than a twentieth of the total. In fact, the portion that yields over 1.5% is now just about a tenth of the market.
As Alphaville’s Paul Murphy puts it: “In less than a year the proportion yielding less than 0.5 per cent has gone from none to almost 1-bond-in-3.”
People made a lot of noise early in February when the yield on a four-year Nestle bond turned negative. This effectively means that the investor buying the bond is paying for the privilege of holding it: The amount of money they pay won’t be covered by the returns they get before the debt matures.
But the concentration on negative yields is missing the bigger story. That is, the return on European bonds everywhere is going through the floor, even if it’s staying positive.
These used to be a mainstay investment for a lot of people. That’s because there’s a little more risk than in the safest government bonds, but more upside too.
But if the typical yield is now below 1%, that simply won’t be enough for a huge number of people.
Murphy nails it with his succinct analysis: “This is nuts.”