The global pile of negative-yielding debt has swollen to a record size after Tuesday’s US presidential election sparked a rally in global bond markets.
Bonds worth $17.05tn now trade with a yield below zero, according to the market value of the Bloomberg Barclays Global Negative Yielding Debt index, surpassing the previous peak reached in August last year. It means buyers are willing to pay a high enough price for the debt that they are guaranteed to make a loss if they hold it to maturity.
The landmark is the latest sign of red-hot demand for top-rated bonds, despite massive borrowing by governments and companies as they navigate the economic fallout from the Covid-19 pandemic.
Investors say that bond markets have been able to swallow the deluge of extra issuance, despite the worse economic picture, thanks to the huge asset-purchasing programmes unveiled by central banks to counter the Covid crisis. The Bank of England was the latest to scale up its stimulus, announcing an extra £150bn of government bond purchases on Thursday, while the European Central Bank is widely expected to follow suit with an expansion of its €1.35tn programme next month.
“Central banks have been buying up more debt than governments can throw at them,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “That’s been pushing yields down in spite of the huge fiscal expansion.”
The negative-yielding debt pile has more than doubled since March, when a global bond sell-off pushed yields sharply higher. Although the value of negative-yielding bonds has eclipsed last year’s record of $17.04tn, the surge in issuance from global governments and companies in recent months means it constitutes just over a quarter of the world’s investment-grade debt, still short of 30 per cent reached in 2019.
This week’s milestone, revealed in daily index data released late on Thursday, comes as a closer-than-expected US election boosts bonds around the world. Markets had been positioning for a massive fiscal stimulus package after an anticipated Democratic sweep of the presidency and Congress, which was expected to fuel growth and inflation — knocking the price of government debt. But with Joe Biden now appearing likely to be hamstrung by a Republican Senate if he wins the presidency, US Treasuries rallied as investors scaled back their stimulus expectations.
Although Treasury yields remain in positive territory, the gains in the world’s largest bond market dragged prices higher elsewhere. That rally pulled a swath of bond markets below zero, particularly in the eurozone, where Italian five-year yields turned negative for the first time on Thursday.
Investors say the proliferation of very low and negative yields pushes them to seek out higher-yielding debt in markets like Italy or in riskier asset classes, in a mirror of the dynamic that has helped drive stock markets higher over the past decade.
“It’s pushing people out of cash and high-quality assets and into taking more risk,” Mr Dowding said. “People are looking for a return that’s greater than nothing.”