Market comment by Richard Steffan, Barclays Isle of Man

Who would have thought in January that one of the best performing asset classes this year would be German bunds, given the already depressed yield of 25 basis points at that time?

Global bond markets have continued their rally this year despite record low yields.

German, French and other core European bonds have now entered the sub-zero world.

A world, oddly enough, that consists of around 30% of the bond market and that has doubled in size to around $16tn since December 2018.

Buying ultra-long bonds at record low yields just seems counterintuitive. For instance, why would someone consider buying a sub-zero yielding bond in order to make a loss when held to maturity?

Investors brave enough to have bought the 100-year Austrian sovereign bond at a price of 120 in January, and a yield of 1.6%, would have made over 60% so far this year.

So there is money to be made even by investing in negative or low-yielding bonds.

However, buying negative or low-yielding bonds is more of a necessity than a choice for many investors.

Institutional investors may be forced to buy longer duration bonds at maturities where yields are still positive.

Institutional buyers are the life blood of the market. For example, mandated institutional investors seeking to provide positive returns overcome re-investment risk by investing in long-duration bonds.

Active managers, on the other hand, have always looked at relative opportunities rather than absolute yield while providing positive returns for their investors.

Investing in long-dated bonds doesn’t seem to be the solution per se in a low-yielding environment.

For now, investor concerns are dominated by the late cycle, the timing of the next recession and risks arising from trade tensions and Brexit.

A substantial change in the market outlook might be required for yields to trend higher again.

There are simply too many factors that weigh on bond yields: political uncertainties which lead to a deterioration in growth, lower trending inflation and central banks starting to lower yields around the globe.

The market, as ever, seems biased and tends to overshoot.

A more positive outcome from US-China trade negotiations or US gross domestic product growth resisting significant falls could lead to some repricing.

In the longer run, however, it will be the US and European central banks’ main aim of tackling lower trending inflation that takes precedence.

Leaving rates unchanged or hiking them is the least likely scenario and rates will continue to anticipate this.

So where should investors invest in a world of negative yields?

It primarily depends on each investor’s return target, risk profile, investment restrictions and preferences. In the long run one option is to build diversified multi-asset portfolios that can withstand short-term volatility, sharp pricing actions or even negative yields.

Investors should take measured risk to achieve their investment goals in the long term. From a market perspective, there is value in investment grade bonds, selected emerging market bonds and quality stocks as diversifying options to achieve positive returns in the long run.