Where Can You Get Higher Bond Yields?

Summary

• Bond yields in developed markets like the US, UK, Germany and Japan are less than 1% or even negative
• To earn meaningful yields, investors now need to venture into emerging markets
• Some markets like Turkey or Brazil carry significant currency risk, but others like China or India less so

Market Implication

• EM bonds should see greater interest, which could see their returns pick up.

It seems like an age ago, but US government bonds yielded close to 2% last year. Today they yield a paltry 0.8%. The US, then, joins many other developed markets with less than 1% yield on their government bonds. Italy offers only 0.8%, the UK 0.3%, Spain 0.2% and Japan 0% (Chart 1). Meanwhile, both France and Germany offer negative yields – you get back less than you put in. So where can an investor get some yield?

The simple answer is emerging markets, hence the popularity of EM bond funds in recent years. At the top of the league table is Turkey, where government bonds yield almost 13%. This is followed by South Africa at 10%, Brazil at 8% and Indonesia at 7%. Investors could do well earning such yields, however there is a catch. The bonds are denominated in local currency, so the risk is that the yield you earn on the bond could be swamped by the currency going against you.

Take Turkey. Its currency has fallen over 25% against the dollar. So, if you are a dollar-based investor, the currency move would have more than eliminated your 13% yield. You could have said the same for Brazil, which saw a similar currency move. Of course, the currencies may not fall as much in the next 12 months, but that’s the risk you take.

Some emerging markets have seen gentler currency moves in recent years: India (down 3%), China (up 6%) and Malaysia (up 1%), for example. So while these countries bonds offer lower yields ranging from 2.5% to 6%, they could also offer less currency risk.

But either way, in a world where bond yields are incredibly low in the major developed countries from the US to the UK to Japan, investors can still find much higher bond yields by venturing into emerging markets. They just need to be careful of the currency risk.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)