Total negative-yielding debt falls to $10 billion as bond prices fall
The end of pandemic-era monetary policy pushed global levels of negative-yielding debt down to $10 billion for the first time since April 2020.
Government bond prices around the world have fallen since the start of this year as investors position themselves for central banks to raise interest rates and end large-scale asset purchases in a bid to contain the surge in inflation.
Bond yields – which rise as prices fall – have, in turn, hit their highest level since before the coronavirus pandemic took hold in many markets.
In the euro zone and Japan, whole swathes of government debt have traded at sub-zero yields in recent years – a scenario that occurs when prices soar so high that investors are certain to lose money. if they keep their bonds until maturity. But a decline in bond prices led many of those yields back into positive territory.
“It reflects changing times and the changing landscape of monetary policy,” said Kristina Hooper, chief global market strategist at Invesco US. “A reduction in negative-yielding debt is a symbol of this desire to return to normal.”
The value of debt with sub-zero yield soared to $18.4 billion at the end of 2020, according to a closely watched Bloomberg bond index, as central banks bought large chunks of sovereign bonds to prop up markets affected by the pandemic. Some corporate debt has a negative yield, but the majority of these bonds are issued by the government.
The value of negative-yielding debt fell back below $10 billion on January 7 and remained below that level until January 12, when it rose back to the $10 billion level.
A sell-off of US government-issued Treasury debt, which began in December, played a significant role in diminishing the global negative debt pile – even as US borrowing costs only briefly turned negative on some short-term debt – because of the propensity of the world’s major bond markets to move in unison.
Yields on Treasuries rose to their highest levels since the start of the pandemic as the US Federal Reserve said it would scale back purchases of Treasuries more quickly and signaled that it may be ready to start reducing the size of its balance sheet, driving higher returns around the globe.
“We have a Fed that is eager to start removing its experimental monetary policy tools,” Hooper said. “He even wants to start reducing his balance sheet this year.”
Investors also reacted to the European Central Bank’s planned reduction in the pace of its own asset purchases, announced last month, and even started betting that eurozone interest rates could rise in 2022.
Germany’s 10-year yield hit its highest level in nearly three years this week, slightly below zero, while Berlin’s longer-term borrowing costs turned positive.
High inflation in the euro zone “will preemptively take the market in that direction,” said Sonal Desai, chief investment officer for fixed income at Franklin Templeton.
Even in Japan, where the central bank is expected to keep interest rates below 0.1% for the foreseeable future, borrowing costs have risen. Yields on the county’s seven-year government bonds rose above zero this week for the first time since April.
Overall, the amount of negative yielding debt has decreased by $2 billion since the start of the year. Negative-yielding debt now makes up about 18% of the Bloomberg Global Aggregate bond index, down from 30% a year ago, in a shift seen by some investors as the start of a return to normality in bond markets.
“The thing to remember is when you’re buying fixed income, you’re not supposed to get negative returns,” Desai said.