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Negative bond yields have become a thing of the past this year after a string of sharp interest rate hikes by the world‘s major central banks – with the exception of Japan.
When bond prices climb so high that buyers who hold bonds to maturity are sure to lose money, bond yields sink into negative territory. At the height of the Covid-19 crisis, negative yields swept a large part of the global debt market. Those sub-zero yields stem from a massive central bank stimulus package, with the Federal Reserve and several other central banks slashing interest rates and buying up massive amounts of debt to support markets battered by the pandemic.
The total stock of negative-yielding bonds ballooned to a record more than $18 trillion at the end of 2020, according to a Bloomberg index that tracks bonds with sub-zero yields. But that debt has now been reduced to less than $2 trillion — all in Japan — after the euro zone and Switzerland ended their experiment with negative interest rates to fight inflation.
“Given that negative-yielding bonds accounted for 40% of the government bond market at the height of the pandemic, this is a stunning reversal,” JPMorgan analysts wrote this week.
In the U.K., yields on some short-term bonds remained marginally negative until June, although the Bank of England never set negative rates, according to the Wall Street bank. By September, two months after the European Central Bank (ECB) raised its benchmark interest rate to zero, bonds yielding below zero disappeared from the euro zone, JPMorgan added.
Negative yields have gone from commonplace in recent years to nearly disappearing from the market, underscoring the speed with which monetary policy has shifted so far this year. It is also the latest sign that the Bank of Japan is bucking the global tide: The central bank has kept interest rates below zero and stuck to a policy of capping longer-term bond yields, known as “yield curve control.”
That contrast with rapidly rising borrowing costs in other economies has pushed the yen to its weakest level in 24 years, fueling speculation that the Bank of Japan may be forced to raise its yield ceiling.
“The goodbye to negative yields may only be a few months away as we have now brought forward the timing of the Bank of Japan’s adjustment of yield curve control” to the first quarter of 2023, JPMorgan said.
Translator / Zephyr