Negative yields have upended non-U.S. and global fixed-income indexes, although they haven't stopped bond markets from rallying.
Fixed-income index fund managers hold negative-yielding securities “to an extent consistent with the proportion of negatively yielding securities in the index,” said David Blake, London-based director of international fixed income, Northern Trust Asset Management, which manages $398 billion in fixed-income assets, in an e-mail.
“From a benchmark perspective, approximately 25% by market value of the Barclays Global Aggregate index presently consists of negative-yield issues,” Mr. Blake said.
“In contrast, virtually none of the Barclays U.S. Aggregate index consists of negative-yield securities,” he said.
Thierry Adant, senior investment consultant, Willis Towers Watson PLC, New York, said, “Global aggregate or global sovereign bonds or global corporate bond index funds will have significant exposure to European markets, anywhere from 20% to 30%, and I would suspect a good amount of those assets will be either at zero or negative yields. The way those indexes are constructed they just include all the instruments in the universe.”
For “passive index funds, unfortunately their mandate is quite strict,” Mr. Adant said. “So they have to follow the index, and the index has bonds with negative yields.”
The negative yield trend hasn't spread to U.S. fixed-income indexes. And so far, the negative yields appear to have little impact on U.S.-based asset owners, said Eileen Neil, managing director, Wilshire Consulting, Santa Monica, Calif.
“It's important the distinction is that the negative yields are outside of the U.S. and ... are in sovereign debt,” Ms. Neil said.
Non-U.S. developed market “sovereign debt is not utilized to any great degree by U.S. plan sponsors from a strategic perspective,” said Ms. Neil. “Only 2% of institutional assets in the U.S. are in non-U.S. bonds.” In aggregate, corporate and public defined benefit plans allocated, respectively, 1.2% and 2.2% of assets to the combined category of global and international fixed income, including emerging markets debt, as of last Sept. 30, according to Pensions & Investments' annual survey of the 1,000 largest retirement funds.
U.S. assets owners have tended to steer away from them “because they have always been lower yielding relative to U.S. securities, particularly when you factor in the cost of hedging” currency risk, Ms. Neil said. “Non-U.S. bonds tend to be fairly fully hedged or the hedge tends to be very high. So that's a big factor to why U.S. plan sponsors have not really had big exposure to (non-U.S.) sovereign debt.”
Mr. Adant added, “In the U.S. we haven't seen a need for action yet because they (institutional investors) haven't been impacted by” negative yields.