Negative-Yielding Debt is Abandoned by Investors as Central Banks Fight Inflation

Investors’ willingness to buy debt that guaranteed a loss if held to maturity was one of the most unusual quirks in financial markets of the

As the period of unusually easy monetary policy in most major economies comes to an end, the amount of negative-yielding debt in the globe has decreased to a level that is around seven years low.

According to a Bloomberg Barclays index, the total portfolio of negative-yielding debt was $2.4 trillion last week, down 87 percent from the $18.4 trillion peak hit in December 2020.

One of the most peculiar anomalies in the financial markets over the past ten years was investors’ willingness to purchase debt that guaranteed a loss if held to maturity. The amount of this debt started to increase in the middle of the 2010s as the European Central Bank, the

Bank of Japan

8301 -1.51%

and others became negative to combat inflation that was too low.

Then, early in the Covid-19 epidemic, it erupted when central banks throughout the world tried to support economies by cutting interest rates and buying huge amounts of assets.

Policymakers are currently attempting to deal with prices that are rising at their fastest rates in decades. The ECB raised its main rate to zero last week, becoming the most recent significant central bank to do so. The world’s largest source of the remaining negative-yielding debt is Japan, which is also the biggest holdout.

Few bet on the eurozone returning to negative interest rates anytime soon. a June poll by

Deutsche Bank

survey of financial market experts revealed that 64% of participants gave another stretch of negative rates in Europe a possibility of 50% or less.

After observing negative consequences, including asset price bubbles and pressure on banks, the ECB might be reluctant to go back to zero rates, said the

Carsten Brzeski,

ING Groep’s

head of macro research globally. Negative interest rates have been criticised by banks for squeezing their earnings, in part by reducing the margins they may make on loans.

For the ECB to go back into crisis mode, “we would need to witness a very severe recession,” Mr. Brzeski added.

The likelihood of increased policy rates had already caused European bond yields to increase. The yield on the most carefully monitored government bond in Europe, the 10-year German bund, changed to positive earlier this year for the first time since 2019. It dropped from 1.027 percent on Friday to 1.019 percent on Monday. As prices increase, bond rates decrease.

Among nations that also tried with negative interest rates were the central banks of Denmark, Switzerland, and Sweden. All three have started a campaign to tighten monetary policy, which has helped drive up the yield on government bonds for most of this year. Although the yield on the benchmark 10-year notes for both Denmark and Switzerland is positive, both countries’ key interest rates are still in the negative range.

According to, the total amount of negative-yielding debt outstanding worldwide decreased to $1.63 trillion in June.

FactSet

data, then slightly recovered to $2.4 trillion as of Friday, returning to levels last seen in 2015.

Japan, where the BOJ has reiterated it is not yet inclined to tighten monetary policy, is the largest remaining global outlier. It has maintained short-term interest rates at -0.1%, and it has set the target yield on 10-year government bonds at about 0%. experts at

JPMorgan Chase & Co.

At the end of June, it is estimated that Japan accounted for 84 percent of all government debt with negative yields, including short-term notes.

Even at negative yields, some buyers in recent years were happy to take refuge in the security of government bonds. However, the increase in subzero debt also contributed to the stock market bubble because many investors were return-hungry and believed there was no other option than buying shares.

Despite the fact that sharp price increases will reduce real, or inflation-adjusted, earnings, analysts and investors claim that rising worldwide rates are contributing to a reconsideration.

According to Collin Martin, fixed-income strategist with the Schwab Center for Financial Research, “when we’ve looked at the global bond environment over the past several years, it’s just been unattractive because of the yields offered.” “Now that there is finally income available, this may potentially create an opportunity for fixed-income investors.”

According to data from EPFR, which records the buying and selling of exchange-traded and mutual funds by both individual and institutional investors, flows into European government bond funds have increased this year. According to EPFR data as of July 20, those funds have brought in nearly $12.8 billion so far this year, more than three times as much as they did in all of 2021.