Europe’s incredible declining yields

With yields grinding ever lower, income-seeking investors have begun to head in some novel directions.

For income-oriented investors, the combination of ECB quantitative easing, negative yields and negative interest rates is a real problem. Increasingly they are reallocating their funds into investment grade or high-yield bonds, but also into other interest-bearing asset classes. Given the small size of the market for higher yielding assets, even only a minor reallocation of money will support spread tightening and, we believe, lead to attractive total returns over the course of the year.

Part of the reallocation has already taken place on the back of stabilizing growth indicators in Europe and sound credit fundamentals. Up to the end of February, according to JP Morgan data, mutual funds saw strong inflows, reversing most of the outflows from the second half of 2014. The same data suggests high-yield debt now accounts for some 8% of mutual fund assets.

Henning Lenz – Meriten, a BNY Mellon company

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