(Bloomberg) -- "I’m melting, I’m melting!"
The dying lament of a Wicked Witch? Yes. But it’s also an apt description of what’s been happening to bond yields since the financial crisis, according to Bank of America Merrill Lynch (NYSE:BAC). In 2008, there was $28 trillion of debt yielding 4 percent or more. Now, it’s down to $3 trillion.
An era of unprecedented monetary accommodation and structurally slower growth has been accompanied by a seemingly insatiable search for yield. Investors will now accept lower relative returns on risky debt or extend duration to clip coupons on sovereign bonds that still aren’t anywhere close to pre-crisis levels.
Barnaby Martin, European credit strategist at BofA, believes that a scarcity of corporate debt will continue to drive credit spreads even tighter in 2018. U.S. tax reform and solid cash-flow generation by European firms are poised to weigh on investment-grade issuance in both regions.
Read More: Global Corporate Bond Drought Helps Solve Low-Yield Puzzle
"Investors across the globe are still very much in need of quality yield," he wrote in a November 21 report. "Until central banks become a lot more hawkish with their commentary, the need for quality yield is unlikely to dissipate, we think."
BofA forecasts 2018 total returns of 2.2 percent for U.S. high-grade debt, 6.5 percent for U.S. high yield, 1 to 1.5 percent for European high-grade and 4 to 4.5 percent for European high yield.