Negative-Yielding Debt Has Sticking Power, Despite Growth in Eurozone, U.S.

The world’s supply of negative-yielding sovereign debt is still at elevated levels, even though the European Central Bank (ECB) plans to cut monthly asset purchases in an environment of eurozone economic gains.

As of Dec. 4, 2017, there was $9.7 trillion of negative-yielding sovereign debt outstanding, up from $9.5 trillion on May 31, 2017 and $9.3 trillion a year ago, said Fitch Ratings in a new report. Analysts anticipate 2.3% and 2.2% GDP growth in the area in 2017 and 2018, respectively, while growth this year has exceeded their forecasts. The gains have spurred ECB officials to plan a slowdown of asset purchases to €30 billion per month beginning in January. “However, these changes have not led to materially higher yields on government debt for short- or long-term maturities in the eurozone,” Fitch said.

Total negative-yielding debt in Europe has increased over the last six months to a year, with much of the growth being attributable to the appreciation of the euro relative to the U.S. dollar, the ratings agency said. Yields in Japan and Europe are mostly flat, or marginally lower in aggregate, compared to six months and a year ago.

The continued monetary easing by the ECB is probably having an impact on global financial markets. “ECB net purchases of public-sector debt securities have been roughly 3.5 times the volume of net issuance on average in 2016 and 2017, forcing holders of eurozone debt to purchase other assets, such as U.S. treasury securities. While long-term yields in the U.S. remain low, they remain well above core eurozone yields that are near their 2017 lows,” Fitch analysts said. Meanwhile, on Dec. 4, the spread between U.S. and German 10-year government bond yields was just over 200bps.

Buy and hold fixed-income investors in medium- and long-term sovereign debt are being challenged in this low-rate environment. Foreign investment has likely contributed to a rapidly flattening yield curve in the U.S. as the Fed continues to raise the Funds rate slowly. Demand from investors has put downward pressure on U.S. yields, with the 10-year treasury remaining mostly flat in recent months.

“Meanwhile, yields on shorter-term securities have risen rapidly, bringing the spread between benchmark 2-year and 10-year U.S. treasury securities to 57bps on Dec. 4, the tightest since before the financial crisis,” Fitch said. “This is despite the fact that U.S. GDP growth has exhibited strong momentum and outperformance in 2017, similar to the eurozone.”

– Nicholas Stern, managing editor

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