Government Bonds and Negative Yields

Watching the global sovereign bond yields plummet into negative territory has been a rather spectacular phenomenon indeed. Government bond yields around the world are hitting all time lows and it appears that we are going to be in this territory for quite some time, to say the least.

One of the recent, most influential events to occur that added stimulus to the already heightened uncertainty in the global economy, Brexit, has created a bond buying frenzy. A flight to safer assets by global investors after Britain decided to leave the European Union added $380 billion alone to the already staggering amount of negative-yielding bonds. The benchmark 10-year Gilt yield has fallen below 0.6% for the first time on record and it has also come under increased pressure after the Bank of England decided last week to cut its interest rates to a new record low of 0.25% and delivered a new government and corporate bond buying scheme. There is a very real possibility that we are going to see the Gilt dip below the zero line in the near future.

Sovereign debt buying seems to be the favourite choice for global investors at present. There is currently almost $10 trillion of negative-yielding government debt with the vast majority, roughly $6.25 trillion, belonging to Japan. France, Germany and Italy also follow as preferred safe havens for investors, although, one could argue that the main reason for the negative yields across the Euro Area are being caused by the European Central Bank’s bond purchasing scheme causing bond prices to soar and conversely causing the respective yields to plummet. There seems to be no limit for the central banks and their quantitative easing schemes and it looks plausible that this number is only going to increase at a rapid pace.

It’s hard to believe the current state of the Japanese bond market, with 20-year yields falling below zero in recent weeks. The Bank of Japan purchases 80 trillion yen ($783 billion) worth of Japanese government bonds a year and with the different streams of monetary policy running dry the BoJ still denies that it is pursuing a policy of so-called “helicopter money” and it also denies the possibility of adopting the policy in the future. Whatever the case may be, Haruhiko Kuroda has a reputation of surprising the market.

With the European Central Banks extreme sovereign bond buying scheme, there is no surprise (rather a sense of wonder) at the current yield of European government debt. The benchmark 10-year German Bund turned negative last month with no signs of slowing down, and with the Denmark and the Netherlands 10-year bonds in negative territory, and France not far behind, it’s like there is going to be a host of countries in the negative yield club in the near future.

It is clear to see that negative yields are here to stay. The question remains, when will the negative yields bottom and the light at the end of the tunnel begin to shine again?

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Reuters: Business News