Bond rally pushes global negative-yielding debt stock above $ 16 billion

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Sovereign Bond Updates

The value of the global negative yielding debt stock has climbed to more than $ 16.5 billion, the highest in six months, as a relentless global bond rally pushes borrowing costs below zero.

Government bond yields have fallen in recent weeks as some traders have piled in, a move that has blinded many investors who expected an economic rebound from the pandemic as well as higher inflation for increase long-term borrowing costs.

While some of the biggest moves have come in the US Treasury market as traders unwind their bearish bets, bonds from Japan and the Eurozone – the two main strongholds of negative-yielding debt – have also benefited. .

Japan’s 10-year yield fell below zero this week for the first time since December. In Europe, the German 10-year yield fell to minus 0.51 percent, its lowest level since early February. The country’s 30-year yield has also fallen below zero, meaning all of Germany’s debt, which serves as the benchmark for eurozone bonds, is now trading at negative yields.

The riskier borrowers of the monetary bloc followed in Germany’s wake, with French debt trading at sub-zero rates up to 12-year maturities, Spain up to nine years, and the Italy and Greece up to seven years. The global negative-yielding debt pile rose from just over $ 12 billion in mid-May and is approaching December’s all-time high of over $ 18 billion, according to an index compiled by Barclays.

Negative returns mean that investors are willing to pay for the opportunity to lend their funds. Those who hold this debt to maturity are guaranteed a loss.

While the change partly reflects growing concerns that the Delta coronavirus variant could slow the recovery, many fund managers and analysts argue that the lower yields, which typically signal a bleak outlook, are out of step with reality. economic. Instead, some are pointing fingers at the massive bond purchases by central banks, which they say had a disproportionate effect during calm summer trading conditions.

The European Central Bank increased the pace of its biggest debt buyback program to 87 billion euros in July, above the 80 billion euros recorded in the previous three months. According to ING strategist Antoine Bouvet, these purchases have “exploded” bond yields over a wide range of maturities in the euro zone.

A dramatic drop in yields was “normally a pretty good sign that markets are predicting a dramatic slowdown in growth or even a recession,” he said. “Don’t be fooled. I’m not ruling out economic worries 100%, but overall the reason interest rates have fallen so much is because of central bank interventions.

Traders say activity has declined in recent weeks, which means the markets have moved on the basis of relatively few trades. In Japan, typically the sleepiest of the world’s major government bond markets, there was no trading activity on the 10-year benchmark bond on Tuesday.

Many managers who continue to anticipate a rebound in rates have decided to come out of the summer lull before renewing their bearish positions.

“Investors are saving their bullets because they were badly burned in the last quarter,” said Mohammed Kazmi, portfolio manager at Union Bancaire Privée, which has dropped betting on German bonds in recent weeks. . “We have to wait for new triggers for the markets to sell again, and we are not looking to hinder that move during the August period.”


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