Why Global Yields Are Collapsing

There are many reasons investors are piling into U.S. debt.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Global yields on government bonds are plummeting, in a descent that has a little bit to do with monetary policy, and a lot to do with an ongoing flight to safety among investors.

U.S. Treasury yields dipped to levels not seen in a year—10-year yields tested a low of 1.70% Tuesday morning, having already dropped some 50 basis points since the end of 2015. Japanese yields on 10-year debt, meanwhile, went negative for the first time. And eurozone yields weren’t doing that much better—10-year German bunds hit their lowest levels since last April.

Investors Flock To Treasury Bond ETFs

Investors have been piling into the security of government-issued debt so far in 2016. On the ETF front, that demand can been seen in funds such as the iShares Short Treasury Bond ETF (SHV | A-97), and the iShares 20+ Year Treasury Bond ETF (TLT | A-83). Even aggregate bond funds have captured assets year-to-date. Check out the sampling of funds below:

There are three key factors driving yields lower across the globe:

  1. Concerns over global growth centered on China, weak commodities prices and oil prices’ relentless decline. Emerging markets and developed markets alike are all struggling to spur growth.
  2. Widening of credit default swap spreads for banks, according to MarketWatch. These spreads are measured between bonds—such as corporate debt—and Treasurys of similar maturity. The wider they are, the more risk is associated with the companies issuing the debt, and the more favorable Treasurys look. From a sector performance, financials are the second-weakest sector in the S&P 500 year-to-date.
  3. Monetary policy in Japan essentially allowed yields there to go negative for the first time. As the Wall Street Journal put it: “It’s the latest sign that the world’s central banks are seeing their carefully laid-out plans unwound by a panicky market.” The Bank of Japan surprised markets, and now experts are saying that even lower rates could be in the cards.

All this weakness globally makes the safety of U.S. Treasurys—and the stronger yield in relative terms—particularly compelling. The demand is pushing up Treasury prices, which pressure the yields.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.