From 2012 and 2015, it was estimated that budget deficits for governments in the Eurozone were reduced by 40% because of lower borrowing costs. The reduction in the cost of borrowing can be attributed to central banks policies. Low bond yields allow for governments to reduce their deficits and possibly lighten their current austerity measures, and lately, many yields have fallen into negative territory.
Spain recently sold a 3 year bond with negative yields, and Japanese, German and Swiss investors have paid for the government to borrow money through 10 year negative yield bonds. Governments in Europe and Japan have launched bond-buying programs, and central banks in developed markets have bought government bonds to push yields lower, in order to tempt investors into buying riskier assets to stimulate inflation and push economic growth.
After the 2008- 2009 financial crisis, the central banks’ low borrowing rates and bond yields haven’t created sustained economic growth, and easy monetary policy from the world’s central banks have reduced interest rates and volatility in the markets. Fiscal stimulus is another alternative that hasn’t been used as much, but it has been found that generally speaking, a fiscal stimulus through spending in infrastructure, consumer vouchers and/or tax cuts can boost growth and raise inflation expectations.
Investors are currently investing in emerging market bonds because of yields that are far above those of developed markets, however if policies are switched, it could prompt a massive sell-off in holdings that are in the current best performing sectors.