Bond World Is Backing Away From All That Negativity as 2019 Ends

By John Ainger

Updated: December 23, 2019, 5:00 AM EST

It’s been the year that turned bond-market logic on its head, yet 2019 is ending with some hope that the worst of the negative-yield drama is over.

The global stock of debt with sub-zero yields has fallen to $11 trillion, the least since June, as a thaw in U.S.-China trade tensions brightens the world economic outlook. Earlier this year, a third of all investment-grade bonds—$17 trillion—had rates below 0%, meaning that buyers holding the securities to maturity are guaranteed to make a loss.

The phenomenon, which upended the conventional wisdom that investors should be compensated for lending to governments or companies, is a reflection of the extreme demand for a safe place to put money amid heightened geopolitical and economic risks. Even with negative yields, investors can still earn a return if bond prices keep rising, or by taking advantage of favorable currency dynamics that effectively inflate returns.

“The global economy now shows tentative signs of stabilization,” said Arne Lohmann Rasmussen, chief analyst at Danske Bank A/S. “For global yields, 2020 confirming that growth is not falling off a cliff and that indicators are about to stabilize would take away yet another support factor for bonds.”

During the year, traders battled over a dwindling pile of debt that still offered a positive yield and, at one point, Germany’s entire bond curve had sunk below zero as far out to 30 years.

But now there are early signs that even the safest of assets may be beginning to creep back into positive-rate territory. Danske Bank expects 10-year bund yields to climb above 0% in the second half of 2020 as the global manufacturing sector bounces back from the standoff over trade.

The risk to that picture is any flare-up of tensions between Washington and Beijing, which could revive fears of an impending recession. The U.S. yield curve inverted in August, one indicator that an economic contraction may be as little as 18 months away. The specter of “Japanification” too, a term used to describe tepid inflation and stagnant growth, is also showing signs of spreading from Europe into other parts of the world.

The following graphic tracks the spread of negative-yielding bonds around the world, broken down by country and by sector:

Negative-Yielding Debt by Country

Americas
Europe
Asia
Other regions

Total:

Americas

Canada
Mexico
U.S.
Chile

Europe

Austria
Belgium
Switzerland
Czech Republic
Germany
Denmark
Spain
Finland
France
U.K.
Hungary
Ireland
Iceland
Italy
Liechtenstein
Luxembourg
Latvia
Netherlands
Norway
Poland
Portugal
Romania
Sweden
Slovenia
Slovakia
Bulgaria
Malta
Lithuania
Croatia
Russian Federation

Asia

Cyprus
Japan
South Korea
Singapore
Israel
UAE
China
Hong Kong
Indonesia
Saudi Arabia

Other

Australia
New Zealand
International organizations
South Africa

How can a bond have a negative yield? It starts when an investor buys a bond for more than its face value. If the total amount of interest the bond pays over its remaining lifetime is less than the premium the investor paid for the bond, the investor loses money and the bond is considered to have a negative yield.

Data: Bundesrepublik Deutschland ‒ Finanzagentur

Photo illustration by 731. Getty Images (4)

Investors are willing to pay a premium—and ultimately take a loss—because they need the reliability and liquidity that government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

Bond World Is Backing Away From All That Negativity as 2019 Ends

Negative-Yielding Debt by Country

How to Get a Negative Yield