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Pool of Negative-Yield Debt Shrinks Rapidly as Bond Market Turns

  • Sub-zero pool now $6.5 trillion, down from over $12 trillion
  • Bonds have slumped since central bankers’ hawkish turn in June

Central bankers’ signals of a coming end to the era of unprecedented stimulus are helping shrink the pile of debt with negative yields, which is now the smallest since just after the Bank of Japan went sub-zero.

The selloff in global bonds that started in June means there is $6.5 trillion of securities in the Bloomberg Barclays Global benchmark index that guarantee losses if held to maturity. That’s down from a peak of more than $12 trillion just after the U.K.’s Brexit referendum in June last year. It now represents a mere 14 percent of the overall index, the lowest in 18 months.

Policy makers over the past decade responded to a slew of crises that followed the 2008 credit crunch by slashing policy rates to levels that were not just unprecedented, but in some cases previously deemed almost inconceivable -- breaking below the zero bound. The world’s three biggest monetary authorities doubled down with asset purchases that swelled their combined balance sheets to almost $14 trillion.

Now, they are hoping that growth momentum is healthy enough to cope with a more normal policy mix -- and that is starting to turn the world of bonds back into a more recognizable place. And a healthier one for pension funds and banks that need higher long-term rates to boost returns.

Central Banks are telegraphing policy normalization -- read about that here.

“Negative yields threatened to bring a collapse to the monetary system,” said Park Sungjin, the head of principal investment in Seoul at Mirae Asset Daewoo Co., overseeing $8 billion. “With negative-yield assets shrinking, it shows it won’t happen. It’s very welcome.”

The most stunning policy turnaround may be completed on Wednesday in Canada, when central bank Governor Stephen Poloz could raise rates in the first concrete step in the direction of synchronized tightening. Swaps traders see a 92 percent chance the BOC will raise rates, up from just 5 percent odds priced in a month ago.

Comments by European Central Bank President Mario Draghi last month reverberated across the bond market -- see the impact here.

The bond world remains a long way from what many would call normal. The pile of negative-yield debt is still greater than the combined fixed-income markets of Italy and Germany. And while the term premium on 10-year U.S. Treasuries may be rising, it remains below zero too -- indicating that investors aren’t demanding extra compensation to own the benchmark maturity instead of rolling over a series of shorter-dated obligations.

The shift toward tighter policy has raised concerns about how ready the world is for less-than-loose monetary settings, though neither stocks nor bonds have seen extreme turmoil so far. For now, rates are moving up at a similar pace to inflation, and that may be key for how far central bankers are willing to tighten.

“Central bank officers are hawkish because they’re worried about inflation,” Park said. “That means the pool of negative-yield debt will continue to shrink.”

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