Implications of the Year-End Decrease in Negative-Yield Debt Pile on the Bond Markets
At times of recession and general market stress, investors turn to government debt bonds to seek stability. The current US-China trade war has had implications worldwide with the trade competition impacting states interconnected in trade relations with either one or both countries. In times of the current economic paradigm where government bonds, and specifically negative-yield debt pile/sub-zero bonds, are accumulated within the global market, the prospect for investors to invest in such bonds, and especially negative yielding bonds, is generally lower than before. Negative-yield debt pile has topped $14 trillion in July, currently making up more than 25% of the global investment-grade debt, and Germany’s government bonds are now under water where the German government is paid a 0.5% premium by investors for the purchase of its benchmark bond according to Alnger from Bloomberg.
This negative-yielding debt pile is a strange phenomenon that disregards basic economic way-of-thought that the longer one loans, the return increases. Governments benefit from this phenomenon as they are incentivised to borrow more with less interest payment and as they are paid by investors to borrow. Individual companies that issue bonds also reap the benefits of lower borrowing costs alongside private equity firms which leverage capital to fund the majority of their acquisition projects.
The implication that this current phenomenon of the presence of negative-yielding debt pile has impacts, as such, the global economic platform as well as the corporate and finance legal sectors. Bond issuance, individual corporations and banks, and private equity firms among others seek the regulatory guide of legal framework specialists in such turbulent stages of the economy and the bond sector of the law firm’s work corporate pile will increase – having implications for the areas of economic change worldwide. .
Returning to this discussion of negative-yield debt pile and sub-zero bonds, material change has emerged with the end-of-the-year sell off in the specified bonds. Indications that this trend is potentially beginning to end have followed suit with current recession fears abating to a certain extent with the potentially emerging US-Trade deal among other signs of political stability. End-of-the-year global sell-off in the global bond markets have helped shrink the negative-yielding debt accumulation by 6 trillion USD since its peak in the summer of 2019, according to Stubbington from the Financial Times, and these aforementioned signs of the emerging US-China trade deals have further fed a drop in bond prices. This has pushed Japan’s 10-Year Yield above zero for the first time among US and the Eurozone yields affected significantly alongside Japan.
The negative-yield debt pile has shrunk by $6 trillion to just above $11 trillion and this trend is likely to impact the appeal of government debt bonds in the wake of a potentially stabilizing economy. It is evident the way government bonds, and specifically the negative-yield debt pile is responding to the relative stabilization of the current macroeconomic and geopolitical landscape and investors and advisors alike have shown interest in learning more about the implication of this move, analyst Jim Reid at Deutsche Bank has specifically regarded it a potential precedent for central banks worldwide to move away from negative rates. The appeal of bonds are likely to falter, and the current paradigm with the decreasing negative-yield debt pile has had a material contribution to this potential change.
By William Lee