A mini bear market in bonds might be what the world needs as investors amass US$13 trillion in negative-yield debt

The plunge in bond yields, which has powered a stock market rally, partly reflects investors’ outsize expectations of further monetary stimulus

Positive news on the US-China trade war could trigger a fixed income sell-off on fears that central banks might pull back from policy easing

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A pedestrian looks at an electronic board displaying a graph of the US 10-year Treasury yield outside a securities firm in Tokyo, Japan, on January 4. Forty per cent of global bonds currently yield less than 1 per cent. Photo: Bloomberg

Published: 2:30pm, 27 Jun 2019Updated: 2:32pm, 27 Jun 2019

A picture is said to be worth a thousand words. In financial markets, the number US$13 trillion explains a lot about the way investors are positioning themselves, their perceptions of risk and, most importantly, why markets are increasingly vulnerable to a sharp and disorderly sell-off.

The number refers to the global stock of government and corporate bonds trading at negative yields, one of the most striking consequences of a decade of ultra-loose monetary policy and a development once considered to be financial madness.

Last week, the universe of negative-yielding debt crossed the US$13 trillion mark for the first time, surpassing the last peak in mid-2016. As recently as last September, when investors were fretting about an excessive tightening of US monetary policy, the market value of bonds with sub-zero yields stood at less than US$6 trillion, according to data from Bloomberg.

Yet, mounting concerns about a sharper slowdown in the global economy, coupled with dovish tilts in policy by the Federal Reserve and the European Central Bank, have fuelled a spectacular rally in fixed income.

The yield on Germany’s benchmark 10-year bond, which stood at 0.57 per cent at the beginning of October, currently stands at minus 0.3 per cent, a whisker above its record low set last week. Its American equivalent, meanwhile, has plummeted almost 120 basis points since November to just above 2 per cent. According to Bloomberg, 40 per cent of global bonds currently yield less than 1 per cent.

Federal Reserve Board chairman Jerome Powell speaks at a news conference following the closed two-day Federal Open Market Committee meeting in Washington on May 1. Investors are betting on more monetary policy easing from central banks. Photo: Reuters

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