Black Hole of Negative Rates is Dragging Down Yields Everywhere

11 July, 2016

As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt.  

What we are seeing is a mechanical yield grab taking place in global bonds. The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes. – Jack Kelly
There is now $13 trillion of global negative-yielding debt, according to Bank of America Merrill Lynch. That compares with $11 trillion before the Brexit vote, and barely none with a negative yield in mid-2014.

In Switzerland, government bonds through the longest maturity, a bond due in nearly half a century, are now yielding below zero. Nearly 80% of Japanese and German government bonds have negative yields, according to Citigroup.

Now the yield grab is spreading to bonds that have a riskier profile. The more investors search for yield, the more bond yields fall.

Italy, which is in the throes of a banking crisis, has about $1.6 trillion worth of negative-yielding sovereign debt.

The yield on Lithuania’s 10-year government debt has more than halved this year to around 0.5%, according to Tradeweb. The yield on Taiwan’s 10-year bonds has fallen to about 0.7% from about 1% this year, according to Thomson Reuters.

Elsewhere in the developed world, New Zealand’s 10-year-bond-yields have fallen to about 2.3% from 3.6% as investors cast their nets across the globe.

Clients don’t care if it is Mexico or Poland or South Korea, he said, they just want a higher yield.

Another avenue is corporate debt. About $276 billion of euro-denominated corporate bonds now trade at a negative yield, according to Bank of America Merrill Lynch.

On Thursday, investment-grade-rated Walt Disney Co. locked in the lowest long-term borrowing costs of any U.S. company in history when it issued a 10-year bond with a 1.85% coupon and a 30-year bond with a 3% interest rate, according to LCD, a unit of S&P Global Market Intelligence.

Ricky Liu, a high-yield-bond portfolio manager at HSBC Global Asset Management, said his firm has clients from Asia who are willing for the first time to invest in portfolios that include the highest-rated junk bonds.

Today’s yield grab could be setting up tomorrow’s problems.

Even as yields fall in emerging-market debt, for instance, the credit quality of some of these countries is falling, analysts say.

Sovereign credit ratings are on track for a record number of downgrades this year as declines in commodity prices hit emerging economies, according to Fitch Ratings. The credit-ratings firm has downgraded 15 nations in the first half of the year, compared with a previous high of 20 downgrades for the whole of 2011, around the peak of the eurozone credit crisis.

Changes in monetary policy could also trigger potential losses across the sovereign-bond world. Even a small increase in interest rates could inflict hefty losses on investors.

Low yields, analysts say, are also distorting the signals for which bond markets are typically relied upon.

The recent collapse in the 10-year Treasury yield to record lows has produced signals usually associated with a slowing economy, for instance. That is despite little sign the U.S. is heading for a recession.

Recently, the extra yield investors demand to hold the 10-year relative to the two-year Treasury note hit its lowest level since November 2007. In the past, investors have taken this narrowing spread as a warning sign that growth momentum may soon slow because the Fed is about to raise interest rates—a move that would cause shorter-dated bond yields to rise faster than longer-dated ones.

Now, like much else, it is largely being blamed on investors’ quest for yield.

“In fixed income you’re forced to go somewhere to get yield,” said Viktor Szabo, an emerging-markets fund manager at Aberdeen Asset Management . “Where are you going to get it?”


"Black Hole of Negative Rates is Dragging Down Yields Everywhere". WSJ. Web. Christopher Wittall.