Nearly $3 trillion negative-yielding bond disappears from universe

According to data from Bloomberg Index, the pool of subzero bonds — which offer investors a guaranteed loss to maturity — is now about $4.9 trillion, the lowest since December 2015. In Europe, the amount has fallen 80% to the equivalent of $1.9 trillion since its December 2020 peak, the lowest since September 2015; In 2014 it was zero.

This shift marks the beginning of the end of a mind-boggling anomaly in modern finance – the people paying to borrow money. Negative rates were good for borrowers because it meant they, not investors, would effectively get the interest paid. On the other hand, the situation encouraged bond investors to speculate in other assets in their quest for yields, and prolong the lives of companies that might have otherwise collapsed.

“The decline in the universe of negative yielding bonds has the potential to become self-reinforcing as some investors, such as insurance companies and pension funds, have extended maturities in previous years and down the rating spectrum to avoid negative yields. Were gone, there are now minimal pressures to do so,” strategists led by Nikolaos Panigirtzoglu at JPMorgan Chase & Co wrote in a note to clients.

Negative-yield debt is disappearing as central banks around the world begin to withdraw emergency pandemic support to tackle red-hot inflation – slashing demand for bonds, pushing their prices down and raising their yields . European Central Bank governing council member Klaas Knott said on Sunday he expected interest rate hikes in the fourth quarter, while US payrolls data on Friday fueled hopes of aggressive moves around the world.

“As central banks normalize policy through rate hikes and (more slowly) balance sheet reductions, the decline is set to continue,” said Vincent Chagneau, head of research at Generali Investments.

In Germany, one of the world’s major bastions of negative rates, 10-year yields posted a 10th straight daily increase, the longest progress in 22 years. They have increased from minus 18 basis points to 23 basis points at the end of 2021.

Borrowing costs for most indebted European governments, including Greece and Italy, have risen since the ECB’s sharp pivot last week, underscoring the risk of sudden changes in monetary policy. The move to government bonds is spreading to corporate credit. Financing costs for Euro high-end borrowers have jumped above 1% for the first time since June 2020.

But strategists at JPMorgan said that moving away from negative yields and negative policy rates could actually create a “tailwind” for major economies, as “negative rates tend to dampen past unintended consequences.” Strategists said negative rates have led to mis-allocation of capital, reduced bank profitability, hampered credit creation and disrupted the functioning of money markets.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.