Pool of Negative-Yielding Debt Is Now the Least in Three Years

(Bloomberg) -- The world's well of debt with yields below zero has shrunk to the lowest in more than three years as the prospect of imminent interest-rate hikes drives a selloff in bonds.

The amount of negative-yielding securities has fallen to $7.67 trillion, according to a Bloomberg index, the least since 2018. It has slumped almost 60% since a late-2020 peak as central banks took the first steps toward reducing the extraordinary stimulus that propped up bond markets and sent yields diving during the pandemic.

While the price correction has imposed painful losses on fixed-income assets so far this year, more positive yields should also come as a relief to investors who have been forced to take on ever more risk in pursuit of boosting returns. Some portfolio managers, including central banks, can only buy positive-yielding securities.

“A slide to zero may still be far away, but with the big central banks moving towards a different policy setup, there should be plenty more potential for it to fall,” said Jan von Gerich, chief strategist at Nordea Bank Abp.

The trend of sub-zero yields has been most prevalent in Europe, home to more than half of the world's negative-yielding debt. But that pile has roughly halved since September as persistently high inflation fans bets of a first interest-rate increase by the European Central Bank this year. The ECB, along with the Bank of England, will deliver rate decisions on Thursday.

‘Why Am I Holding This?' Saying Bye to Europe's Negative Yields

Sea Change

While yields fell as investors flocked to havens following disappointing earnings from technology bellwethers, a sea change is afoot in bond markets.

German 10-year government borrowing costs climbed above 0% for the first time in three years last week. While many shorter-maturity yields across the region are still negative, Irish and French five-year rates turned positive this week and Portugal's look set to follow.

Yields have risen even in Japan amid speculation the central bank will rethink its monetary easing. Although Governor Haruhiko Kuroda has repeatedly quashed such views, two-year overnight-indexed swaps breached zero for the first time since the Bank of Japan adopted its negative-rate policy in 2016. The benchmark 10-year yield has also climbed toward the upper end of the central bank's desired trading band.

Still, the surge in inflation has meant the real yield available to investors remains deep in negative territory in many parts of the world. The inflation-adjusted 10-year Treasury yield is around minus 0.7% while its German equivalent is about minus 1.9%.