Why yields may take another leg down

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The ZYNY world—or zero-yield to negative-yield—is set to drive another wave of yield chasers in the markets, JPMorgan said.

"[ZYNY] cannot be separated from what is pushing these yields to zero," JPMorgan said in a note Friday. "QE (quantitative easing) buying by central banks is the proximate cause, but is in turn motivated by the growth disappointments, falling inflation, and the fear of deflation," it said.

The number of bonds and bond markets with near-zero or negative yields is rising, JPMorgan said, noting that around $3.6 trillion worth of developed market government bonds—or 16 percent of its Global Bond Index—was at a negative yield two weeks ago.

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"Zero yields on safe government debt pushes the search for yield into hyper drive, swamping local fundamentals," JPMorgan said. "Term premia, liquidity premia, and volatility premia are all under pressure."

Yield outlook

It expects yield spreads across countries will tighten, with countries with steeper curves getting bought by investors in countries with flatter curves. As QE won't have much impact on bond yields in countries where those yields already close to zero, investors will likely seek out better yields in non-QE countries, it said.

JPMorgan has been putting on "5s30s flatteners" in the U.K. and U.S.—or bets that the difference between the five-year and 30-year yield will decrease—and it's overweight on Australia, New Zealand and euro zone peripheral bonds.

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"The demand for safe yield should extend to emerging markets with strong credit quality. We are long here," JPMorgan said.

Within corporate credit, the bank expects spreads will initially widen as government bond yields fall, as deflation will hurt borrowers.

"Over time, though, the need for yield starts to dominate, and investors move into the debt of safer, less leveraged corporates," it said. "This is not yet happening in Europe or the U.S., but an extended period of lower growth would likely lower corporate bond supply. We are probably not that far from this."

Stocks losing their allure?

But while JPMorgan is putting on ZYNY bond plays, it's considering whether to scale back its overweight call on equities.

"Easy money is generally good for stocks," it noted. "But at some point, zero bond yields combined with a fear of deflation raise economic uncertainty and thus equity risk premia."

Only when investors have confidence that deflation can be beaten will stocks perform, and even then, bonds won't stay at zero long, it said.

"A ZYNY world should boost higher-income producing stocks, from dividends and buybacks, and preferred stocks. Small caps have lower yields and are thus more likely to underperform," it said. "Financial companies that need income or a steep curve, such as banks and insurers, are unlikely to do well."

One place JPMorgan doesn't necessarily see ZYNY plays is in currencies, with deflation increasing the risk of currency wars and spurring foreign-exchange volatility.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1