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Negative bonds yield as central banks tighten
What does the chart show?
The chart shows the US Dollar value of negative nominal-yielding bonds in developed markets. Debt that yields less than 0% means that investors should lose money if they hold it to maturity. Yet at its peak in December 2020 the value of developed market negative yielding debt was over $18 trillion, largely made up of ultra-low yielding government bonds which were the result of the loose monetary policy seen in places, such as Japan and the Eurozone. Since then, the dollar value of negative-yielding debt has fallen sharply to under $2 trillion. Over the past year, central banks have tightened monetary policy in response to inflation and so yields have risen dramatically, which has reduced the amount of negative-yielding debt to its lowest levels since 2015.
Why is this important?
In recent months, any indication that central banks may begin to pivot away from their current hawkish policies has been followed by sharp rallies in equity and bond markets. In both October and July of this year, global equity markets returned over 7% driven by expectations of pivots in central bank strategy. Low rates and quantitative easing have been largely responsible for the strong performance in equity markets over the past decade, and investors are eager to not miss out on another bull-market run. However, these same policies have been blamed for the high inflation that central banks are so keen to bring under control and so they will be unwilling to return to the excesses that caused these issues. It is important to consider that before 2014, negative-yielding debt was virtually unheard of and only came about as a result of excessively loose monetary policy. With around $2 trillion of negative-yielding debt remaining, symptoms of these policies remain, and so further tightening may still be necessary before there is a true return to ‘normal’. A pivot in policy is unlikely to be a return to loose monetary policy, but instead a pause in rate hikes at a level closer to the historic average base rates. For the Federal Reserve, this would be 4.61%, a far cry from the 0.25% rate that held for so long. The era of easy money coming to an end may be unpleasant for some, but for those who know where to look, opportunities are emerging across all asset classes.
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By Mondial DubaiWhat does the chart show?
The chart shows the US Dollar value of negative nominal-yielding bonds in developed markets. Debt that yields less than 0% means that investors should lose money if they hold it to maturity. Yet at its peak in December 2020 the value of developed market negative yielding debt was over $18 trillion, largely made up of ultra-low yielding government bonds which were the result of the loose monetary policy seen in places, such as Japan and the Eurozone. Since then, the dollar value of negative-yielding debt has fallen sharply to under $2 trillion. Over the past year, central banks have tightened monetary policy in response to inflation and so yields have risen dramatically, which has reduced the amount of negative-yielding debt to its lowest levels since 2015.
Why is this important?
In recent months, any indication that central banks may begin to pivot away from their current hawkish policies has been followed by sharp rallies in equity and bond markets. In both October and July of this year, global equity markets returned over 7% driven by expectations of pivots in central bank strategy. Low rates and quantitative easing have been largely responsible for the strong performance in equity markets over the past decade, and investors are eager to not miss out on another bull-market run. However, these same policies have been blamed for the high inflation that central banks are so keen to bring under control and so they will be unwilling to return to the excesses that caused these issues. It is important to consider that before 2014, negative-yielding debt was virtually unheard of and only came about as a result of excessively loose monetary policy. With around $2 trillion of negative-yielding debt remaining, symptoms of these policies remain, and so further tightening may still be necessary before there is a true return to ‘normal’. A pivot in policy is unlikely to be a return to loose monetary policy, but instead a pause in rate hikes at a level closer to the historic average base rates. For the Federal Reserve, this would be 4.61%, a far cry from the 0.25% rate that held for so long. The era of easy money coming to an end may be unpleasant for some, but for those who know where to look, opportunities are emerging across all asset classes.