Sovereign bond update

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As the relentless rise in global bonds has dragged borrowing costs below zero, the value of the global stock of negative-yield bonds has soared to more than $16.5 trillion, the highest level in six months.

Government bond yields have fallen sharply in recent weeks due to the influx of traders, a move that caught many investors who expected the economy to rebound from the pandemic and rising inflation to raise long-term borrowing costs.

Although the U.S. Treasury bond market has seen some of the biggest volatility as traders lifted their bearish bets, Japanese and Eurozone bonds — the two main bastions of negative-yielding bonds — also benefited.

Japan’s 10-year government bond yield fell below zero for the first time this week since December. In Europe, the yield on German 10-year government bonds fell to minus 0.51%, the lowest level since early February. The country’s 30-year government bond yield also fell below zero, which means that all German debt, which is a reference for the entire Eurozone bond, is now traded at a negative yield.

The more risky borrowers in the Eurozone followed Germany, with French bonds trading at a yield below zero for a maximum of 12 years, Spain for a maximum of 9 years, and Italy and Greece for a maximum of 7 years. An index compiled by Barclays shows that global negative-income debt has increased from just over US$12 trillion in mid-May to a record level of over US$18 trillion in December.

A negative rate of return means that investors are willing to pay for the opportunity to lend money. Those who hold the debt to the maturity date are guaranteed to lose money.

Although this shift partly reflects the growing concern that the Delta coronavirus variant may slow the recovery, many fund managers and analysts believe that the lowest yield that usually heralds a bleak outlook is out of touch with economic reality. On the contrary, some people accused the central bank of buying large amounts of bonds, which they said had had a huge impact in the calm summer trading conditions.

The European Central Bank increased the pace of its largest debt purchase program to 87 billion euros in July, up from 80 billion euros in the previous three months. ING strategist Antoine Bouvet said these purchases “overwhelmed” the yields on various maturity bonds in the euro zone.

He said that a sharp drop in yields “usually a good sign that the market predicts that growth will slow down significantly or even decline.” “Don’t be fooled. I am not 100% ignoring economic concerns, but in general, the reason for the sharp drop in interest rates is central bank intervention.”

Traders said that trading activity has decreased in recent weeks, which means that market volatility is based on relatively few transactions. In Japan, which is usually the sleepiest of the world’s major government bond markets, there was no trading activity on the 10-year benchmark bond on Tuesday.

Many fund managers who continue to expect a rebound in yields have decided to spend the summer calm before resuming their bearish positions.

Mohammed Kazmi, portfolio manager of Union Bancaire Privée, said: “Investors are saving their bullets because they were badly burned in the last quarter,” he has withdrawn from bets on German bonds in the past few weeks. “We need to wait for new triggers for the market to sell off again, and we don’t want to hinder this move during August.”