In land of negative yields, junk bonds are the new haven assets

The new fixed-income haven is, of all things, the market for junk bonds.

With government bonds in Germany to Japan and Slovakia yielding less than nothing, money is pouring into exchange-traded funds that buy speculative-grade debt, traditionally the riskiest of fixed-income assets. The pace is staggering. So far this year, about US$9 billion has flowed into the funds globally, a significant chunk for the US$44.4 billion market in junk-debt ETFs.

In the land of negative yields, even the most conservative firms such as Zurich Insurance Group and Assicurazioni Generali, the biggest Swiss and Italian insurers, are planning to invest in sub-investment grade debt for the first time. One of the bond market's brightest luminaries, Jeffrey Gundlach, says you are better off in junk because the only money to be made on German bunds is from betting against them.

While last week's sudden sell-off in euro sovereign debt gives investors all the more reason to crowd into high-yield assets, the lingering concern is that buyers are exposing themselves to even greater losses. And with the European Central Bank's bond purchases still keeping government yields close to historic lows, many bond investors have few other options.

"Investors are being forced by the central bank to assume more risk," said Jens Vanbrabant, a money manager at ECM Asset Management, which oversees US$6.5 billion. "They're trying to adapt their investment parameters to the new situation of zero or negative yields."

Bond markets around the world are being distorted as central banks step up cheap-money policies to bolster growth and prevent deflation. About US$2.36 trillion of government bonds globally have negative yields, data showed. That means investors effectively pay a dozen governments when they borrow. The situation is particularly acute for the 19 nations that share the euro.