How bonds have changed in Europe

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JP Morgan Asset Management Chief Market Strategist for Europe Stephanie Flanders comments:

“The clue ought to be in the name: fixed income. But that income is now harder to come by, and for large swathes of the European sovereign bond market, it has disappeared entirely. €1.4 trillion in bonds currently trade at a negative yield—approximately 25% of all European sovereign debt outstanding—implying that investors are willing to pay for the privilege of lending money to these governments. With this situation unlikely to change dramatically any time soon, navigating through it is probably the toughest task facing investors this year.

“What has caused this?  First and foremost, the prolonged period of central bank bond buying globally has created an unprecedented demand for bonds, pushing prices higher and yields to extreme lows. Then global disinflationary pressures increased, mainly due to the strong decline of the oil price and falling long-term inflation expectations, creating more downward pressure on rates.

“Why are we stuck with it?  The ECB’s QE plan will see it buy approximately 190% of net sovereign issuance in the eurozone in 2015, meaning there will be a fall in the supply of sovereign bonds available to investors – hence the spiral lower in yields.

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