Financial institutions in developed economies drastically diminished the number of bonds they issued, after the global financial crisis. This decrease was roughly 4 trillion dollars. The decrease in bonds was necessary, as the financial institutions' balance sheets shrank, after regulations began piling up post-crisis.
To add insult to injury, the supply of mortgages that had been regularly securitized into asset-backed bonds contracted. Securitization is the process by which an issuer creates a financial instrument by combining existing financial assets, and marketing different tiers of repackaged instruments to investors. It is a process that promotes marketplace liquidity.
The bond market is a financial market where participants are issued and may trade debt securities. These securities are issued by the government, or are corporate debt securities. The securities facilitate capital transfers from savers to those who issue them. Otherwise, they facilitate capital transfers to organizations that need it for government projects, expanding business, and other ongoing operations.
People go to the stock market to buy and sell equity securities, like common stocks and derivatives. In contrast, people go to the bond market to buy and sell debt securities. Investing in the bond market is typically less risky, as the bond market is much less volatile. Bond prices fluctuate on the open market, in response to its supply and demand.
The global crisis created a hugely negative supply shock (i.e., it diminished the supply of bonds, resulting in a sudden price change). Simultaneously, the demand for fixed-income securities remained stable. Fixed income securities, a.k.a. bonds or money market securities, are loans made by investors to government or corporate borrowers. The diminishing supply of bonds and sustained demand for bonds resulted in an increasing shortage, which in turn created a yield squeeze that lasted nearly a decade. Experts predict that this compression may begin to let up, beginning in 2018.
"Yield" is defined as the income return on an investment, like the interest or dividends received from holding a particular security. Because securities can fluctuate in their value, yields may be considered either "known" or "anticipated." Often, the higher the risk of an investment, the higher the associated yield potential.
After the 2008 global recession, the market for financial company debt securities in the Group of Seven nations shrank and flattened out. But sustained demand for fixed income securities among mutual funds, pensions and insurance companies allowed non-financial companies to increase their issuance of debt securities. As a result, bond yields are historically low. One example of this is the quantitative easing program by the Federal Reserve, European Central Bank, and the Bank of Japan that burned through approximately $14 trillion in assets.
Another reason for the historic low in bond yields currently is the effective shortage of safe-haven investments. Safe-haven investments are defined as investments that are expected to retain their value or increase, in turbulent markets. Because emerging markets are generating more amounts of wealth, but still fail to produce assets that global investors consider to be on-par to developed-nation government bonds, safe-haven investments are in short order. Yet another reason for the globally low yields could be due to low inflation rates.
Through 2007, 10-year US Treasury yields averaged 4.85 percent. Since the beginning of 2009, however, they've averaged "just 2.46 percent" which has given investors the incentive to look elsewhere for higher rates. But now, financial institutions are beginning to issue more again and stabilizing their supply of securities to the market.