The wind down of pandemic-era monetary policy has pushed global levels of negative-yielding debt down to $10tn for the first time since April 2020.
Government bond prices around the world have fallen since the start of this year, as investors position for central banks to lift interest rates and end large-scale asset purchases in a bid to contain surging inflation.
Bond yields — which rise as prices fall — have, in turn, jumped to their highest level since before the coronavirus pandemic took hold in many markets.
In the eurozone and Japan, swaths of government debt have traded at sub-zero yields in recent years — a scenario that occurs when prices climb so high that investors are certain to lose money if they hold their bonds to maturity. But a drop in bond prices has led many such yields to move back in to positive territory.
“This is a reflection of the changing times and the changing monetary policy landscape,” said Kristina Hooper, chief global market strategist at Invesco US. “A reduction in negative yielding debt is a symbol of that desire to return to normal.”
The value of debt with a sub-zero yield mushroomed to $18.4tn at the end of 2020, according to a closely watched Bloomberg fixed income index, as central banks bought up large chunks of sovereign bonds to backstop pandemic-hit markets. Some corporate debt carries a negative yield, but the majority of these bonds are government-issued.
The value of negative yielding debt fell back below $10tn on January 7, and remained below that level until January 12 when it inched back up to the $10tn level.
A sell-off in Treasury debt issued by the US government, which began in December, has played a large role in the dwindling global pile of negative debt — even though US borrowing costs have only fleetingly turned negative on some short-term debt — because of the propensity of the world’s major bond markets to move in unison.
Treasury yields have climbed to their highest levels since the beginning of the pandemic as the US Federal Reserve said it would cut its purchases of Treasuries more quickly and signalled that it may be prepared to start reducing the size of its balance sheet, dragging yields higher around the globe.
“We have a Fed that is eager to start removing its experimental monetary policy tools,” said Hooper. “It even wants to start shrinking its balance sheet this year.”
Investors have also responded to the European Central Bank’s planned reduction in the pace of its own asset purchases, announced last month, and even begun to place bets that eurozone interest rates could rise in 2022.
Germany’s 10-year yield this week climbed to its highest level in nearly three years at a shade below zero, while Berlin’s longer-dated borrowing costs have turned positive.
High inflation in the euro area “will have the market preemptively moving 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 hold interest rates at minus 0.1 per cent for the foreseeable future, borrowing costs have increased. The county’s seven-year government bond yields this week climbed above zero for the first time since April.
Overall, the amount of negative yielding debt has fallen by $2tn since the start of the year. Negative yielding debt now makes up about 18 per cent of the Bloomberg Global Aggregate bond index, compared with 30 per cent 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 that when you’re buying fixed income, you’re not supposed to be getting negative yields,” said Desai.