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

Negative bond yields are a thing of the past this year after a series of large 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 during the depths of the Covid crisis. Those negative readings were due to huge central bank stimulus programs, with the US Federal Reserve and several peers cutting interest rates and buying up swathes of debt to prop up markets hit by the pandemic.

The total stock of negative yielding bonds rose to a record more than $18 trillion at the end of 2020. But that pile has now dwindled to less than $2 trillion – all in Japan – after the eurozone and Switzerland ended their experiments with negative interest rates to fight inflation.

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

In the UK, some short-dated bonds were still trading at slightly negative yields as late 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 hiked interest rates to zero, JPMorgan added.

The almost complete disappearance of negative yields from markets where they were common until recently underscores the speed of this year’s policy shift. It’s also the latest sign that the Bank of Japan is swimming against the global tide by keeping interest rates below zero and sticking to its policy of capping longer-term bond yields — so-called “yield curve control.”

The contrast with rapidly rising borrowing costs elsewhere has pushed the yen to its weakest level in 24 years and sparked speculation that the BoJ may be pressured to raise its yield limit.

“Sayonara for negative yields may be just months away as we have now advanced the timing of the BoJ’s adjustment of yield curve control to Q1 2023,” JPMorgan said.