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DiMeo Schneider & Associates

Investment Manager Research | Knowledge College

Third Quarter 2019: Knowledge College – Negative Rates

November 18, 2019

Third Quarter 2019: Knowledge College
Negative Rates: Financial Alchemy

For many investors, global bonds represent a significant portion of the investable universe and offer incremental diversification benefits. However, the domestic bond market accounts for just a portion of that universe.

The U.S. investment-grade bond market, measured by the Bloomberg Barclays Aggregate Bond Market Index, exceeded $22.8 trillion as of September 11 but represents only 42.5 percent of the developed (investment grade) global bond market universe1.

Although foreign bonds offer enhanced diversification, the growing quantity of foreign debt trading at negative yields has some wondering if it makes sense to invest in foreign
bonds at all. In August, MarketWatch3 reported that global debt with negative yields reached almost $17 trillion. While negative foreign bond yields represent a new feature in financial markets, foreign exchange expectations along with prevailing interest rates contribute to foreign bond returns for U.S. based investors.

Recently, the German ten-year Bund yield fell to an all-time low of -0.70 percent as economic growth slowed in Europe. In effect, Euro-denominated investors holding the Bund are guaranteed a loss if held to maturity.

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