Tuesday, June 1, 2021
The amount of negative yielding debt is shrinking and that’s a good sign that the global economic recovery is well underway. While negative yielding debt became prevalent in many non-U.S. countries after the Global Financial Crisis of 2008/09, the amount had surged to over $18 trillion due to the accommodative monetary policies adopted immediately after the COVID-19 shutdowns. As economies recover though and with the eventual normalization of monetary policy, interest rates have started to move higher and now many developed non-U.S. countries have bond yields at multi-year highs.
As seen in the LPL Research Chart of the Day, the amount of negative yielding debt continues to trend lower. As mentioned, at one point there was over $18 trillion of negatively yielding debt but that amount has come down and currently stands at just over $13 trillion. The average yield associated with all that debt has steadily moved higher as well, from -0.40% at its lows to -0.27% now. The majority of negatively yielding debt has a maturity of five years or less so as that debt continues to mature, the amount of negative yielding debt outstanding should fall as well. Interestingly, all that negative yielding debt isn’t just issued by foreign countries. As of May 28, there is nearly a trillion dollars of corporate debt—including some issued by U.S companies—with negative yields. That is, investors are paying some companies to issue debt.
“Foreign investors in U.S. Treasury markets are an important reason we haven’t seen U.S. 10-year yields move even higher,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “As the amount of negative yielding debt trends lower though the incentive for foreign investors to invest outside their home markets decreases, which could put upward pressure on our Treasury yields”
So what does this mean for U.S. fixed income markets? Despite rising yields in their home countries, many foreign investors are still better off investing in the U.S. Treasury market even after taking into consideration the costs to hedge out currency risk. That is, when foreign investors buy U.S. Treasuries, they take on the risk of the U.S. dollar as well. Foreign investors don’t want the currency risk so they will hedge that risk back into their home currency to isolate only the yield advantage of holding U.S. Treasuries. So, even after the added cost of hedging back into their home currency, many non-U.S. investors are able to pick up additional yield over their home country 10-year Treasury, which helps increase returns. As the amount of negative yielding debt decreases though, it becomes less likely that we’ll see the amount of crossover foreign investors needed to help keep our Treasury yields from climbing higher.
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