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Negative-yielding debt slips below $2tn as central banks hike rates

By on October 8, 2022 0

Negative bond yields have become a thing of the past this year, following a series of sharp interest rate hikes by global central banks – everywhere, that is, except Japan.

Negative yields – which occur when bond prices soar so high that buyers who hold them to maturity are guaranteed to lose money – have engulfed much of the global debt market at most. strong from the Covid crisis. These subzero levels stemmed from huge central bank stimulus programs, with the US Federal Reserve and several peers cutting interest rates and buying up chunks of debt in a bid to prop up pandemic-hit markets.

The total stock of negative-yielding bonds hit a record high of more than $18 billion at the end of 2020, according to a Bloomberg Index of Debt Traded at Sub-Zero Yields. But that stack has now fallen to less than $2tn — all in Japan — after the eurozone and Switzerland ended their experiments with negative interest rates in a bid to fight inflation.

“This is a stunning reversal given that negative-yielding bonds made up 40% of the government bond universe at the height of the pandemic,” JPMorgan analysts wrote this week.

In the UK, some short-term debt was trading at slightly negative yields as recently as June, although the Bank of England has never set a negative interest rate, according to the Wall Street bank. . Sub-zero yields disappeared from the euro zone in September, two months after the European Central Bank raised its benchmark interest rate to zero, JPMorgan added.

The virtual disappearance of negative market returns where they have recently been commonplace underscores the rapidity of the change in monetary policy this year. It’s also the latest sign of the Bank of Japan swimming against the global tide, keeping rates below zero and sticking to its policy of capping long-term bond yields – which we calls it “yield curve control”.

The contrast with rapid increases in borrowing costs elsewhere pushed the yen to its lowest level in 24 years, sparking speculation that the BoJ could come under pressure to raise its yield limit.

“Sayonara for negative yields may only be a few months away as we have now advanced the timeline for the BoJ’s yield curve control adjustment” to the first quarter of 2023, JPMorgan said.