The global stock of negative-yielding bonds has dwindled to zero after last month’s unexpected policy shift by the Bank of Japan undermined the last bastion of sub-zero yields.
Negative yields — which occur when bond prices climb so high that buyers holding them to maturity are guaranteed to lose money — engulfed a broad swath of global fixed-income markets in recent years, with the market value of debt trading at a yield below zero soaring above $18tn in late 2020 after central banks slashed interest rates and launched huge bond-buying programmes in the wake of the Covid-19 pandemic.
But last year’s abrupt end to the era of easy monetary policy sparked a historic bond sell-off that rapidly shrank the pile, as central banks in the eurozone and Switzerland brought down the curtain on years of negative interest rates.
That left Japan, where the BoJ’s main policy rate still stands at minus 0.1 per cent, as the last bond market to feature sub-zero yields, which means investors are in effect prepared to pay the government to borrow. Buyers were prepared to lock in a negative return either because regulations forced them to hold a certain quantity of the safest government debt, or because bonds remained attractive in comparison to even lower central bank interest rates.
However, last month’s move by the BoJ to relax its policy of pinning long-term yields close to zero pushed up yields in the vast Japanese government bond market and fuelled speculation that Japan’s era of negative interest rates could soon be drawing to a close.
The yield on Japanese two-year government bonds has climbed to 0.03 per cent from minus 0.02 per cent in mid-December.
A Bloomberg index that tracks the market value of negative-yielding debt around the world fell to zero for the first time since 2010 this week. Some short-term Japanese government debt still trades at a yield marginally less than zero, but debt with a maturity below one year is not included in the index.
At their peak, negative yields became emblematic of the extraordinary measures taken by central bankers to stimulate their economies in the wake of the global financial crisis and the outbreak of Covid. Initially regarded as a curiosity by investors, the phenomenon mushroomed to encompass more than a quarter of global fixed income, comprising largely eurozone and Japanese sovereign debt, but also including some corporate bonds and short-term government borrowing in the US and the UK.
While sub-zero nominal yields have vanished, at least for now, high inflation means bond investors still face negative real yields in many markets.