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. So much for the dreaded bond bear market . The plunge in yields – which partly reflects investors’ expectations of further monetary stimulus in the coming months – is sending ripples across asset classes and is far and away the most important driver of markets right now. Its impact on asset allocation and investor behaviour is profound. For starters, rapidly declining borrowing costs are powering a rally in stock markets. The benchmark S&P 500 index hit a record high last week despite the recent escalation in geopolitical risk and scepticism about an 11th-hour deal to ease trade tensions. Rock-bottom yields – and the expectation among investors that rates will continue to fall as the Fed and the ECB loosen policy – are supporting equity valuations. Never mind that, as JPMorgan rightly observed in a report published on June 21, the Fed “has never eased 100 basis points in a 12-month period unless the US economy was in a recession”, investors are convinced that global growth is petering out and that another burst of stimulus is on its way. The ramp-up in bets on further monetary easing is, paradoxically, the clearest sign that investors believe the trade war is likely to intensify. Second, the collapse in borrowing costs is forcing investors to seek out higher-yielding opportunities in a continuation of the “reach for yield” that has dominated the investment landscape for the past decade. This partly explains why emerging markets remain the most popular region for equity investors even though fund managers have not been this bearish about the outlook for global growth since the 2008 financial crisis, a closely watched Bank of America Merrill Lynch survey revealed last week. China’s US Treasuries hoard shrinks to two-year low amid trade war Third, the sharp fall in bond yields has led to market schizophrenia. While expectations of additional stimulus are fuelling the rally in stocks, the rapidly expanding universe of negative-yielding debt is sending a worrying signal about the state of the global economy. As I have argued previously , by loosening policy, the major central banks – in particular the Fed which is managing an economy that is still enjoying relatively robust growth –risk heightening concerns about the slowdown. Markets are clamouring for interest-rate cuts in the US and a fresh round of quantitative easing in Europe. Yet, deep down, investors fear the implications of looser policy – a sharper downturn than they originally assumed – and doubt whether more stimulus would do much to boost growth, especially in the case of a full-blown trade war. Fourth, and most importantly, ultra-low bond yields increase the scope for a sharp and disorderly sell-off at some point. The lower yields fall, the bigger the risk of an abrupt and painful market shake-out if inflationary pressures start to build, or even if the planned meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit in Osaka this weekend results in a more favourable outcome than investors anticipate. How to prevent the G20 summit from becoming Groundhog Day Indeed, the reality is that any positive economic news right now, rather than buoying markets, threatens to trigger another bout of turmoil as investors start fretting that central banks will be less willing to provide additional stimulus. This is not just a manifestation of the unhealthy behaviour that continues to pervade a financial system still dangerously reliant on cheap money, it is also an indication of how difficult it will be for the Fed and the ECB to pacify investors without fanning fears about the global slowdown. While a sharp rise in bond yields would wreak havoc on investors’ portfolios, higher borrowing costs would at least signify a less bearish outlook for growth. A mini bear market in bonds would not go amiss. Nicholas Spiro is a partner at Lauressa Advisory