Soaring inflation slashes $11 trillion from global negative-yielding debt

This year’s hawkish central bank shift is poised to end the era of negative-yielding debt, slashing the global stock of sub-zero yielding bonds by $11 billion.

Bond prices have fallen this year as central banks decide to end large-scale asset purchases and raise interest rates in their fight against soaring inflation, pushing yields up many major economies to their highest levels in years.

As a result, bonds worth $2.7 billion are currently trading at a yield below zero, the lowest figure since 2015, and a precipitous drop of more than $14 billion in mid-December. , according to the Bloomberg Global Bond Index – a broad gauge of the fixed income market. The complete elimination of negative returns would mark a return to normalcy for a wide range of large investors.

“Central banks are late trying to get ahead of this inflationary shock, so the bond market has suddenly priced in a big move in interest rates,” said Mike Riddell, senior portfolio manager at Allianz Global Investors.

Negative yields were once considered inconceivable, then a novelty, and later an established feature of global markets. They mean that debt prices are so high and interest payments so low that investors are certain to lose money if they hold on to their bonds until maturity. They reflect the belief that central banks would keep interest rates low and have entrenched themselves in large amounts of debt in Japan and the eurozone in recent years.

That assessment has changed dramatically in recent months, particularly in the eurozone, where the European Central Bank on Thursday reiterated its intention to end its bond-buying program this year, and traders are betting interest rates interest will drop to zero for the first time since 2014 in December.

Line chart of the value of negative yielding bonds in the Global Bond Index (in billions of dollars) showing the stock of negative yielding debt in freefall

The end of ultra-low or negative yields is a “double-edged sword” for bond investors, according to Riddell. “On the one hand, people take losses on the bonds they hold. But the flip side is that positive risk-free rates mean future returns arguably look better. He added that this would be “good news” for investors such as pension funds who need to hold large amounts of safe assets like government bonds, but also need to earn sufficient returns to meet payouts. future.

The shrinking stock of negative-yielding debt also reflects high levels of inflation, which has pushed investors to demand greater compensation for rising prices, according to Salman Ahmed, global head of macro at Fidelity International.

“Yes, nominal yields are going up, but long-term investors should really care about real yields. It’s what’s left after inflation that matters, and inflation is very high right now,” he said. -he declares.

The Eurozone was the main driver of the reduction in debt swaps to sub-zero yields. As of December, the currency bloc accounted for more than $7 billion of such bonds, including all German government bonds. That figure has fallen to just $400 billion. Japan, where the central bank has so far resisted the global move towards tighter monetary policy, now accounts for more than 80% of the world’s negative-yielding bonds.

Negative yields are likely to multiply again in the euro zone, unless the ECB implements the interest rate hikes already anticipated by the markets. The central bank will struggle to raise rates from the current level of minus 0.5% given the threat to the region’s recovery posed by Russia’s invasion of Ukraine and rising oil prices. resulting energy, Ahmed said.

“I think the ECB has missed the window to normalize policy because Ukraine’s growth shock will be much more severe in Europe,” he added. “In our view, they won’t go back to zero this year, which means negative-yielding bonds aren’t about to go away.”

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