Negative-yielding bond universe shrinks by $2.5tn

The global stock of negative-yielding debt has tumbled more than $2.5tn since the summer, underscoring the dramatic sell-off in bond prices and easing the burden on pension funds that have been starved for income by low rates.

The value of bonds outstanding with sub-zero yields has fallen to $10.79tn, from $13.44tn in mid-August, according to Tradeweb data compiled for the Financial Times. 

More than 40 per cent of the $2.65tn decline in negative-yielding bonds occurred in November alone amid the worst rout for the fixed income market since at least 1990, as $1.7tn in market value was wiped from the broad Bloomberg Barclays Global Aggregate index.

“It has been painful, no question,” said Marilyn Cohen, president at Envision Capital, a fixed income manager, of the rout in bond prices that sent yields rising.

Yields have risen across the board, led by the US as investors anticipate substantial fiscal stimulus next year under president-elect Donald Trump. 

The 10-year Treasury yield has jumped 0.57 percentage points from the summer lows to 2.4 per cent. In turn, 10-year German Bund yields clocked in at 0.33 per cent on Monday, from as low as -0.189 per cent this summer, while Japan’s benchmark bond yield has climbed from -0.287 per cent to 0.041 per cent over that time. 

The abrupt rise in yields, while unsettling in the short run, represents “the light at the end of the tunnel that we’ve been longing for”, said Ms Cohen, adding that the 30-year bond bull market that this summer knocked yields down to historic lows had become “way, way overdone” and made it difficult for clients, particularly senior citizens, who rely on the consistent income that bonds provide. 

Fitch Ratings offered a similar sentiment in a report last week. “Beyond the immediate losses from decreasing bond prices, the sharp decrease in the stock of negative-yielding debt could be positive for institutional bond investors putting new money to work,” the rating agency said. 

“If sustained, it could also help to arrest the trend of falling investment income due to record low and declining sovereign yields over the past several years.”

The narrowing in the amount of debt trading with sub-zero yields has cut across geographies. 

For Japan government bonds the amount has dipped to $5.21tn, from $6.26tn in August, representing 66.1 per cent and 76.8 per cent of the total bonds outstanding, respectively. 

In the European sovereign bond market, the amount has skidded to $3.48tn, or 39.8 per cent, from $4.72tn, or 52.3 per cent. 

The move has been particularly stark in Switzerland, a country that was among the pioneers of negative-rate monetary policies. The country’s entire stock of government bonds traded with negative yield in August, a figure that has since dropped to just over two-thirds. 

The share of corporate bonds trading with yields at less than zero has posted a shallower fall. Roughly 24 per cent of euro-denominated bonds with an investment grade rating had a negative yield as of December 1, from 28.6 per cent in August.