No Inflation With Record-Low Yields Boosting Emerging Bonds

Kenster1_GlobalValue

http://www.bloomberg.com/news/2012-07-19/no-inflation-with-yields-at-record-low-bolstering-emerging-bonds.html

Bond yields in emerging markets are falling to record lows as inflation tumbles compared with benchmark interest rates, providing policy makers with more opportunities to lower borrowing costs.

The GBI-EM Global Diversified Index on emerging-market bond yields declined 79 basis points, or 0.79 percentage point, this year to 5.79 percent, the lowest since JPMorgan Chase & Co. started to compile the data in 2003. Consumer price increases in 15 developing nations from Brazil to China slowed to an average 4 percent last month, even as central banks cut the mean policy rate to 5.5 percent. The 1.5 percentage-point gap was the widest since December 2009, according to data compiled by Bloomberg.

Slower inflation and weaker economic growth will prompt policy makers to reduce interest rates further, spurring gains in developing-nation bonds, according to GAM Investment and JPMorgan Chase & Co. That’s a turnaround from four years ago, when inflation exceeded benchmark borrowing costs and investors fled emerging markets as the global economy sank into a recession.

Sven

This low yield environment really hurts the retirees who depend on them. It is bad enough the traditional investment vehicles such as CDs and domestic bonds pay low dividend. Those who venture into the riskier asset classes including junk bonds and emerging market bonds are facing declining yields. In the by-gone days, CDs yielded over 10%. So what's next?

catch22

The current low yield environment may also be critical to the abilities of some pension funds and insurance companies to maintain money levels to satisfy current and future obligations. The current bright side for them is that they should have decent cap. appreciation in bonds if they have properly placed the monies and do so going forward; if and when interest rates transistion higher.
I received a call from a friend a few weeks ago, regarding that his mother (86) had received $60k profit from the sale of her home. She does not need the money at this time and he stated that she had an annuity from 20 years ago that still pays 5% and may that be a place for the money. Normally, I would have them run the other way; but at 5% (per the contract) and no surrender period on the new monies either; I recommended to park the money there. It may be withdrawn as needed by her, having the normal tax consequences; but also the beneficiary to her son. Note: he and I did read the contract and spoke with the insurance rep. to verify the agreement.
Regards,
Catch