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August 2019 | GSAM Connect

Can a Negative be Positive? In Our View, Yes.

One year ago, German sovereign bonds with a maturity of six-years or less delivered a negative yield. As of this month, negative yields extend across the maturity spectrum through to 30-year bonds (Exhibit 1). Euro-denominated corporate bond yields have tracked sovereign bond yields lower, with around three quarters of the investment grade market being in negative yield territory (Exhibit 2).

Faced with this low or negative rate backdrop, growth uncertainty and yield curve inversion investors may seek to de-risk. However, we think the current environment—which has also been characterized by an uptick in bond-level performance dispersion¹—presents continued openings for active security selection.

Moreover, we think forthcoming monetary policy easing in the Euro area may provide a near-term tailwind for euro-denominated corporate credit, thereby diminishing the case to be underweight. In addition, on a currency-hedged basis, it is not necessarily attractive for European investors to seek higher yields in US fixed income. In fact, after taking into consideration hedging costs, any perceived yield premium can be eroded or even turn negative.

Overall, we would caution against the common perception that negative yields preclude positive returns. In our view, active management, including security selection and yield curve shape views, can continue to deliver potential positive returns, even against a rising stockpile of negative yielding-debt.

Exhibit 1 Negative yields have extended to longer sovereign bond maturities…

Source: Macrobond, GSAM. As of August 28, 2019.

Exhibit 2: …and across euro-denominated corporate bond markets

Source: BoAML ICE European Corporate Index. As of August 2019.

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