With interest rates still low – some government bonds offer negative interest rates – the Eurozone crisis stabilizing and the US economy healthier, investors are emboldened.
A huge amount of liquidity has been sitting in cash or negative yield bonds out of fear. As that recedes, a wall of money is flowing into financial assets. Debt markets are very accommodating and there is a lot of capital sloshing around.
Some of the governments are more desperate than others – in the UK there has been serious discussions on imposing negative interest rates as a stimulus measure. This will further undermine the savers efforts to earn meaningful money to preserve the capital against inflation.
Spread between yields for highly-rated and lower-rated companies bond is far narrower than it is used to be. Investors are chasing returns, sometimes at all cost. It is not unheard off that emerging markets institutes rated at BBB- successfully selling bonds at 3.6 per cent in USD. This makes bonds rather risky and pricy investment.
Investors are putting money in the assets they would not do otherwise for the premium they are getting – stock market at the current returns. Markets are almost at all-time high, while the returns are very low. There is a risk of not only erasing value of the money, but erode the returns as well.