The $7.9trn pile of negative-yielding debt is growing fast

Bloomberg

For all the hand wringing over the end of ultra-loose monetary policy, the world just doesn’t seem able to shake its addiction to negative-yielding debt.
Only two months ago, speculation was rife that the Bank of Japan would have to step in to stop yields from rising. Now, rates on benchmark bonds are poised to drop back below zero. In Germany there are no positive yields as far as seven years along the curve. And globally, bonds with negative yields total $7.9 trillion — close to levels seen at the start of the year — and up from the 2017 low of $5.7 trillion reached in October.
Bonds are back in demand after a sea change in sentiment swept financial markets in recent weeks as the outlook for growth decisively worsened.
“I expect the global economy to be substantially worse in 2019 than this year,’’ said Akira Takei, global fixed income manager in Tokyo at Asset Management One Co, which oversees the equivalent of $500 billion. “The recent drops in bond yields and equities reflect such outlook. Investor views are also changing on the US as an end of the current policy tightening is coming into sight.”
Small wonder developed-market bonds are headed for their best December in seven years, and 10-year US Treasury yields have fallen as low as 2.80 percent, further undermining forecasts they were headed for 4 percent or higher. A cocktail of bad news from sliding US home sales to worsening global manufacturing data point to slowing growth, putting further pressure on yields.
That leaves global financial markets struggling to emerge from the era of ultra-low yields started after the global financial crisis, even with the Federal Reserve on track to raise interest rates this week for the ninth time since December 2015 — and the European Central Bank pledging to start tightening policy next year.

JAPAN’S NEGATIVITY
Japan’s 10-year yields dropped to as low as 0.01 percent on Wednesday after having stayed positive since September 2017. Some BOJ officials have said they see no problem with yields declining to zero or even below, according to people familiar with the matter.
JGB markets are becoming increasingly volatile as benchmark yields approach zero. The central bank’s decision to refrain from cutting bond purchases at its regular operations on Wednesday spurred a surge in futures and a margin call from the Japan Securities Clearing Corp.
Japanese yields are riding a global downtrend sparked by Treasuries, said Eiichiro Miura, general manager of the fixed-income investment department at Nissay Asset Management Corp in Tokyo.
“Markets are worried that a recession will come within a year because rate hikes will hurt the economy, sending stocks and credit markets lower,” Miura said. This will make it increasingly difficult for the BOJ to move towards policy normalisation and push yields even lower, he said.

WEAKER AND WEAKER
Weakening growth — both globally and in the US — has been a major driver of lower Treasury yields, agrees Jon Hill, an interest-rate strategist at BMO Capital Markets Corp in New York.
While a lot of US economic figures are still pretty strong, “if you look one year, two years, three years, whatever, the confidence in how long that positive momentum can sustain becomes weaker and weaker,” he said. If the Fed sees the neutral rate as being below 3 percent, then 10- and 30-year yields will struggle to move higher than that level, he said.