Hunt for Yield
Thanks to quantitative easing, we see record-low interest rates. While yields for short to intermediate maturities in the US are lower than the inflation but still positive, other developed markets such as Japan or European countries even have bond yields negative. Still, it does not implicate that investors have withdrawn from the fixed income markets. Both individual and institutional investors still participate in bond trading. However, the critical question is how these conditions influence the investors. Does their behavior change? Do they reach for yield and prefer riskier bonds in the search for (positive) real yields? In this blog post, we present three novel research papers that offer insights into this topic. The first examines the tendency of both retail and institutional investors to chase bond mutual funds with higher yields. The second research sheds more light on the behavior of institutional fund managers — their transition into higher yields, higher duration and lower rating in the hunt for yield. Lastly, this post also offers insight into a similar situation in the past — the reach for yield in the Netherlands during the 17th-18th century.