Mr Willis adds: “With regards Japanese and European bond yields these can go lower but it is unlikely that either of the central banks will be cutting base rates from here.
“It has been largely acknowledged that moving to negative interest rates was a mistake, so it is more likely that moves in interest rates will be upwards – this would mean an increase in yields, although don’t expect this in the near-term.”
For investors who want to look beyond the developed markets for yield though, there are opportunities in emerging markets.
Salman Ahmed, chief investment strategist at Lombard Odier, suggests: “Emerging market local currency bonds certainly have yield potential. This comes with substantial currency risk, but we also feel that many currencies remain substantially undervalued following the ‘taper tantrum’ in 2013 and the subsequent improvement in fundamentals.”
Emerging market debt is a good source of yield, agrees Mr Willis, but he cautions investors need to be comfortable with the risk, “as these bonds can sell off fast and hard when volatility and risk aversion are prevalent”.
Withstanding volatility
Al Jalso, senior portfolio manager at Russell Investments, also recognises local currency emerging market debt provides an attractive yield.
He cautions: “Over an extended period we see potential for this sector to provide compelling returns but investors will have to withstand local EM debt’s inherently high volatility.”
He outlines a couple of scenarios in which emerging market debt would be subject to increased volatility: “A sharp increase in US closed-border policy, which could drive inflation and surprise Fed policy rate increases, could drive up the US dollar, injecting risk and volatility into this trade.
“Likewise, a global growth slowdown would make EM currencies less attractive, also heightening volatility.”
In the US, it is widely agreed the Federal Reserve is on a rate-raising path, although there are obstacles.
Mr Jalso explains: “The Fed is confounded by a lack of inflationary pressures and a flattening curve – witness the spread between the two and 10-year US treasuries, denoting the curve’s steepness, recently breaking down through the 1 per cent barrier.
“The Fed will be reticent to drive the curve much flatter without fundamental inflationary pressures, so probably won’t hike aggressively.”
He adds: “US rates are also constrained to the upside by their relative attractiveness versus European, UK and Japanese rates. We don’t expect this dynamic to change any time soon as the ECB will keep monetary policy loose for the intermediate term and Japan for the long term.”
