With the ECB finally launching its QE programme, a telling statistic from the strategy team at Bank of America/Merrill Lynch – the fastest growing asset class in the world is now debt with a negative yield. As they describe it: “2013 was the story of low yields. 2014 became the story of no yield. We think 2015 will be all about the theme of negative yields. Central banks have crossed the Rubicon and embraced negative interest rates. The result has been to push large swathes of the government bond market into negative yielding territory”.
Most of the bonds that are affected lie in the Eurozone, but Japan remains the outright leader of this anomalous club, with the largest stock of minus yielding bonds. 10 government bond markets across the globe are part of the club. Just as important is the fact that the stock of bonds with any kind of positive yield is shrinking. The brokers think that will drive yet more investors to look at yield alternatives, and tip “safe” dividend-paying stocks, currently yielding around 3.7%, to be among the major beneficiaries.
Of course they already look expensive on most historical metrics, but these are not normal times. If the current level of asset prices, inflated as they are by global lashings of QE, already make you feel queasy, consider this. If safe dividend stocks rerated the same way as long duration bonds have done, the strategists calculate, they could see another 50% leg up in value, back to 1999-2000 levels. Scary stuff – or is it just “stockbroker economics” (the self-serving idea that however expensive, the equity market is always cheap) at work again?