Last week a new player entered the scene. Excess liquidity, low interest rates and the macroeconomic improvement were the perfect ingredients for China to enter the debt market at negative rates with the issuance of 750 million in a bond denominated in euros due in 2025 and a rate interest of -0.15%.
This placement was the perfect catalyst to drive the volume of debt at negative rates. According to data from Bloomberg, the amount of bonds that trade with negative yields reaches 14.74 trillion euros, a new all-time high.
So far this year, the volume has grown by 47%, an increase that exceeds 105% from the annual lows recorded on March 19 (7,178 billion, levels from January 2019). The outbreak of the pandemic and its expansion in Europe and the United States caused a strong shake in the markets that resulted in sharp falls in the stock markets and in rises in debt yields, with the consequent collapse in prices.
Once again, the central banks had to arrive to restore stability. The return of zero rates in the US – in the euro area they have remained at that level since March 2016 – and the battery of measures put in place to deal with the situation have helped to calm tensions. But debt purchases have been the most effective instrument to return returns at negative rates.
The first to make a move was the Federal Reserve, which in early March unanimously agreed to acquire government bonds and mortgage-backed securities.
A few days later, Christine Lagarde followed in the footsteps with the announcement of the shopping program against the pandemic, an instrument that was expanded in June, to 1.35 billion euros.
They are joined by the Bank of Japan, a pioneer in debt purchases, and the Bank of England, which at the last meeting raised theirs by 20%, to 895,000 million pounds (one trillion euros).
The result of expansionary policies is a reduction in financing costs for both governments and companies. In some cases it is even the investor who is forced to pay to leave their money in these assets instead of obtaining returns.
In the euro zone alone, the amount of public debt at negative rates reaches 7.077 trillion euros, with Germany (1.74 trillion) and France (1.88 trillion) leading the way. The peripheral countries do not escape this trend. Spain has 1.2 trillion, followed by Italy (0.84 trillion) and Portugal (0.13 trillion) of public bonds with yields below 0%.
But the fact that debt is currently trading with negative returns does not mean that it was issued at these rates. In Spain, negative returns have only been achieved in the primary market for medium-term bills and bonds.
Debt tensions even caused the Treasury to pay again to sell 12- and 9-month bills for the first time in four years. If corporate bonds are added, the volume of debt in the euro area that trades at negative rates stands at 8.07 trillion, of which two trillion correspond to the German market.
The negative debt extends to the US and Japan. The volume of US government bonds trading at negative rates reaches 1.54 trillion, a far cry from Japan’s 5.3 trillion.
Low interest rates coupled with unconventional measures deployed by central banks are providing great relief for companies and states.
At a time of falling revenues and increasing spending to cover the deficit and the measures put in place to deal with the pandemic, low interest rates are helping to maintain financing costs and make the increase in debt more digestible. debt.
Rising coronavirus cases in Europe and falling yields have become the perfect cocktail for Japanese funds to reduce their exposure to European bonds. According to Bloomberg data, in the first nine months of the year, Japanese investors bought European debt worth 10 billion dollars (about 8,450 million euros), the lowest figure since 2017.
This represents a fall of 80% since 2019 and the Forecasts suggest that the downward trend will continue given the prospects for economic deterioration. With this move, the Japanese funds have become net sellers of French and German sovereign bonds while reducing purchases of Spanish securities to the lowest level in three years.
Naoya Oshikubo, Sumitomo Mitsui Trust AM’s senior economist points out that yields on Spanish debt are not high enough to be attractive. In the last three years, French and Spanish bonds had been especially popular with Japanese investors with greater tolerance for risk, as in return these securities had higher returns than other assets such as German debt and continued to offer a degree of security decent.
Despite this change in attitude, experts believe that this slowdown will not have an immediate effect on the market because the ECB is expected to boost its debt purchase program at the December meeting.
In the last three years, French and Spanish bonds had been especially popular with Japanese investors with greater tolerance for risk, as in return these securities had higher returns than other assets such as German debt and continued to offer a degree of security decent.
Despite this change in attitude, experts believe that this slowdown will not have an immediate effect on the market because the ECB is expected to boost its debt purchase program at the December meeting.
In the last three years, French and Spanish bonds had been especially popular with Japanese investors with greater tolerance for risk, as in return these securities had higher returns than other assets such as German debt and continued to offer a degree of security decent.
Despite this change in attitude, experts believe that this slowdown will not have an immediate effect on the market because the ECB is expected to boost its debt purchase program at the December meeting.