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Fixed Income—In Depth

A deeper analysis of investment trends and topics across asset classes and global markets.

October 29, 2020

Peter Wilson, Global Fixed Income Strategist

How investors can adapt to the negative real yield era

Key takeaways

  • The extraordinary policy changes made by the Federal Reserve (Fed) in response to the coronavirus pandemic have ingrained sub-inflation yields (that is, negative real yields) as an enduring feature of U.S. and global bond markets. We believe this negative real yield era could persist for some time.
  • These policies have resulted in big changes to the yield distribution within U.S. bond markets, and a dramatic shrinking of the opportunity set for bond buyers seeking yields in excess of inflation. These changes may continue to have far-reaching ramifications for markets and investors.
  • We list several potential implications for fixed-income investors, some of which are already evident in current markets.
  • Risk assets should continue to get a boost as negative real yields may be more successful in driving further asset-price appreciation than in achieving the Fed’s goals of 2%-plus inflation and of stimulating the real economy.
  • More fixed-income investors may move further outside their traditional investment spheres, supporting credit markets.
  • Positive real yields available in emerging market bonds may find new buyers.
  • Gold may increasingly be seen both as a macro portfolio hedge for equities and as an alternative inflation hedge.
  • And the U.S. dollar may continue to be weak relative to the euro.