The rupturing of the summer calm in markets over the last week has swept more than $1tn of sovereign and corporate bonds back into positive yielding territory, as investors question the future of central bank stimulus.
The value of debt trading with a yield below zero has fallen to $12.6tn in the last week, according to data from Tradeweb, snapping the pattern of the last few months in which yields have touched record lows.
German 10-year bunds — the benchmark for debt in the eurozone — have been dragged into positive territory for the first time since July, with the yields rising to 0.04 per cent, alongside a climb in yields in the US and Japan. Yields rise as bond prices fall.
Despite the European Central Bank and the Bank of Japan pursuing vast bond-buying programmes in an effort to ignite inflation and economic growth, there was concern all summer over the scale of the rally in fixed-income. That erupted late last week when the ECB failed to announce an extension to its programme and several policymakers at the Federal Reserve signalled the US central bank could raise rates next week.
“The move is a double-edged sword,” said Nick Gartside, JPMorgan Asset Management’s international fixed income chief investment officer. “The fuel to that fire … was chatter from central banks about what their reaction function should be now … that fuelled a sense of, ‘Hang on, have central banks done too much?’ Our response is no.”
Money managers were likely looking to buy on the dip, he added. However, investors holding much of the debt likely suffered capital losses, as the value of their bonds slipped. Rating agency Fitch has warned that investors in some of the best-rated sovereign bonds could suffer losses of as much as $3.8tn should yields snap back to 2011 levels.
Debt sold by weaker eurozone economies — the so-called periphery — have been among the hardest hit as investors reposition. The value of Italian sovereign debt trading with a negative yield dropped more than 30 per cent, as three-year Italian notes bounced back into positive territory.
Euro-denominated corporate bonds were also caught up in the recent market decline; roughly $731m now trades in negative territory, down from $916m on September 6, according to Tradeweb.
The focus for investors is now on next week’s policy decisions from the Bank of Japan and the Fed. A string of lacklustre US economic reports this week have prompted investors to scale back expectations of a rate rise this month. Retail sales and industrial production both fell short of Wall Street expectations. That, in turn, helped global stock markets regain ground on Thursday after almost $2tn was erased from valuations over the last week.
The recent weakness has reignited concerns around the lengths fund managers have gone to in order to capture yield this year, as they send prices of bonds to new highs. Small price declines can have outsized effects on bond investors’ returns, as the coupons they once pocketed have declined.
“Yields are the dominant issue, with a growing sense of unease for the autumn,” said William Porter, a credit strategist with Credit Suisse.
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