$1 Trillion in Bonds Have Left the Negative-Yield Zone This Year

  • Inventory of sub-zero debt falls to lowest since July
  • Positive yields reflect inflation expectations, QE unwinding

As the global bond market comes to terms with the unwinding of quantitative easing from the U.S. to Europe, it’s cutting inventory of the assets that bear the hallmark of a decade of distortion: negative-yielding debt.

In the first eight trading sessions of the year, the pool of bonds with sub-zero yields has shrunk by about $1 trillion to $7.3 trillion, the smallest since July, signaling an uptick in growth and inflation prospects that’s helping to normalize bond markets around the world.

Buying bonds with negative yields made sense when investors anticipated deflation and the potential to make capital gains as QE drove rates lower. But with the world economy set to enjoy its strongest year since 2011, factories struggling to keep up with demand, and inflation expectations steadily rising, central banks have the room to withdraw support and normalize rates.

Minutes of the European Central Bank’s December meeting on Thursday showed policy makers are considering a hawkish shift in their communication in the early months of 2018. Days before, the Bank of Japan trimmed longer-dated bonds in an asset-purchase operation, though officials said it shouldn’t be taken as a new sign they’re planning to exit stimulus.

Policy makers in Europe have halved the ECB’s bond-buying program, leaving it open as to whether they would carry on after the targeted end in September. And stimulus looks set to last even longer in Japan. Governor Haruhiko Kuroda this month emphasized the BOJ is far from its 2 percent inflation target, highlighting the nation’s “deflationary mindset.”

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