Back from Below Zero

Mid Week Bond Update

Back from Below Zero

As global rates normalize, the stock of negative-yielding bonds has shrunk – but is still over $6 trillion; Turkish and Argentine euro bonds found their bids for now; U.S. investment grade spreads tighten, even as yields rise.

A decade ago, at the start of the global financial crisis, negative interest rates were mostly seen as theoretical curiosities. But a mere two years later, at the start of March 2010, the market value of corporate and sovereign debt with yields lower than zero was over $425 billion. By June 2016 the market value of bonds with negative yields touched just over $12.1 trillion1, thanks to massive central bank QE programs and investor demand for so-called safe haven holdings.

These pressures had central banks setting their reference rates below zero, in effect charging banks for the privilege of leaving their reserves on deposit, in exchange for central bank backing. Once those bank reference rates were set, issuers followed suit with bonds priced such that their yields to maturity were less than zero. And as these rates rippled through markets, the unimaginable became commonplace.

But since that $12.1 trillion peak, the market value has fallen nearly by half, to roughly $6.25 trillion as of September 24. And as shown in the accompanying chart, the fall during the past year or so alone has been some $3.85 trillion. By comparison, the value of the Fed’s entire reserve balance sheet was $4.24 trillion as of September 21, suggesting the magnitude of the decrease is on the scale of the actions of global central banks.


Source: Bloomberg. Index: Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index. September 24, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The reduction in size is the result of several factors, not least of which is the rise of interest rates in much of the world’s bond markets – which have driven down some bond values and helped bring some positive-coupon bonds back above water. And since the average maturity of the negative-rate bonds is about three years, the fall-off could accelerate as more bonds mature and the European Central Bank (ECB) begins reducing its bond-buying program in October.

All of which suggests that the Fed’s interest rate and balance sheet decisions, while critically important to the world’s economies, aren’t the only forces at work to change the size and nature of the world’s fixed income markets.

On the Rise: Turkish and Argentine Euro Bonds

The dramas surrounding these EM countries are far from over, with the head of Argentina’s central bank resigning abruptly in the midst of negotiations with the IMF and Turkey beginning to talk of trimming domestic expenditures.  But euro-denominated bonds issued by these emerging market economies are showing signs of life, suggesting that some value-oriented investors whose base currency is the euro are willing to step up.

There’s more pain possible as Argentina attempts a by-the-book, bond-market-oriented recovery, and Turkey continues to dig in its heels while playing to a domestic audience at the expense of a global one.  But that does suggest it could potentially be worthwhile to continue to monitor these markets before consensus opinion improves.


Source: Bloomberg, September 24, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

On the Slide: U.S. Investment Grade Corporates

The yield-to-worst of the U.S. Investment-Grade (IG) index2 has climbed steadily so far this year, pausing briefly at about 4.1%. Some investors have been asking whether this might be an early signal of a deterioration of credit quality or economic conditions at the margin.

The market appears to have an answer: at least for now, prices are consistent with the belief that credit quality in the IG space is doing fine. The option-adjusted spread for this index has been moving down steadily since the end of June, reaching 107 basis points on September 24, This suggests that the rise in yield of the IG Index is due more to the rate environment, rather than second-order effects on the economy.  In the new rate environment currently unfolding, it remains unclear whether that optimism will continue.

All data Source: Bloomberg, September 25, unless otherwise indicated.

1 Source: Index: Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index.

2 Bloomberg Barclays U.S. Corporate Bond Index 



The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. 

The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index measures the stock of debt with yields below zero issued by governments, companies and mortgage providers around the world which are members of the Bloomberg Barclays Global Aggregate Bond Index.



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