Investors returned to an infamous part of the fixed income market last week, US mortgage backed securities, as government yields around the world continued to fall into negative territory.
According to data from Ultumus, the iShares US Mortgage Backed Securities UCITS ETF (IMBS) saw inflows of $291m in the week to 30 August, the second highest across all ETFs listed in Europe.
US mortgage backed securities were the bonds used by banks which caused the biggest crash since the Great Depression in the 1930s.
Moving into more niche parts of the fixed income market is a further sign of the ongoing hunt for yield, which have been artificially suppressed since the Global Financial Crisis following central banks’ quantitative easing experiment.
Around $16trn of negative-yielding government debt is trading on the fixed income market today. German 10-year bunds are currently yielding -0.70% while 10-year Japanese government bonds yield -0.27%.
This has been driven by central banks across developed markets cutting interest rates amid a worsening outlook for global growth.
After signalling four rate hikes in 2019 at the end of last year, the Federal Reserve cut rates in July while the European Central Bank (ECB) has signalled plans to cut rates and take additional measures to stimulate the lacklustre eurozone economy.
In this scenario, David Absolon, investment direct at Heartwood Investment Management, said central banks would “very likely” cut rates and increase their QE programmes.
“These actions would lead to a further rise in the amount of negative yielding debt globally, as well as a further collapse in yield curves meaning that investors would require disproportionately higher compensation for short-term lending relative to long-term lending, reflecting significant near-term uncertainty.”
Meanwhile, Robin Marshall, director, fixed income research at FTSE Russell warned this period of low growth could lead to the “Japanification” of Western economies, where low interest rates prop up ailing companies.
Fixed income has been the asset class of choice so far this year. According to data from Morningstar, fixed income ETFs saw a record $107bn inflows in H1 globally taking over assets under management to $776bn, the first time flows have crossed the $100bn mark in the asset class.