Shrinking finally? Negative-yielding debt pile declines

By Dhara Ranasinghe
The spread of the coronavirus disease (COVID-19) in Frankfurt

By Dhara Ranasinghe

LONDON (Reuters) - The pool of negative-yielding investment-grade corporate bonds in euros practically disappeared in March, Tradeweb data on Wednesday showed, the latest sign of the effect of the coronavirus outbreak on global markets.

The market value of negative-yielding investment-grade corporate bonds on the electronic trading platform stood at just 40.3 billion euros at the end of March, or 1.21% of a total market worth around 3.3 trillion euros.

That was down from just over one trillion euros in February and marks the lowest since at least 2016, according to Tradeweb data that goes back to that year.

Corporate bonds have been hit by a sell-off in risk assets sparked by the coronavirus outbreak. The yield on the iBoxx euro corporates index closed March at 1.96%, after rising to a six-year high at nearly 2.20% earlier in the month. <.IBBEU003D>

"This (fall in negative-yielding bonds) is more to do with the dislocation in corporate markets and spread widening that we have seen in the last month than any comment about debt levels and future debt sustainability," said Tim Graf, head of macro strategy for EMEA at State Street Global Markets, referring to the gap between the yield on corporate bonds and safe assets.

Sovereign bonds with sub-zero yields have also fallen in the face of a sharp rise in fiscal spending to fight the economic hit from coronavirus.

The market value of negative-yielding euro zone government bonds on Tradeweb fell to around 4.04 trillion euros as of the end of March, or roughly 50 percent of the total market worth 8 trillion euros -- the lowest since May 2019.


For an interactive version of the below chart, click here https://reut.rs/2ykEsJe


Negative yielding euro zone bond pool shrinks https://fingfx.thomsonreuters.com/gfx/editorcharts/nmovajnkpab/eikon.png


Germany has introduced a spending package worth up to 750 billion euros ($808.43 billion) and is taking on new debt for the first time since 2013. The United States is set on $2.2 trillion aid package, the largest in its history.

The pool of bonds globally has shrunk to around $12 trillion from around $14.5 trillion at the end of February, analysts said.

Germany's long-dated bond yields rose over 15 bps in March; thirty-year Bund yields are around 0% - they were deeply negative a month ago.


German bond yield curve now and a month ago https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkarwvmn/DE0104.PNG


"The scale of borrowing this time is just enormous and it will be hard for central banks to say five years from now they should be supporting bond markets because of the COVID outbreak in 2020," said Andrew Sheets, head of cross-asset strategy at Morgan Stanley, adding the next economic upturn should see higher yields.

Negative yields on bonds, where investors are effectively paying governments or corporations to own their debt, are typically viewed as a symptom of economic malaise.

Recent weeks have seen massive central bank easing and in the short-term at least, analysts expected yields on sovereign bonds to continue to face downward pressure.

The U.S. Federal Reserve, European Central Bank and Bank of England have all ramped up asset purchases. In recent days, even yields on very short-dated U.S. Treasury bills have dipped below 0%.

"The reality is that central banks are backstopping pretty much any debt market of significance, such that I expect the amounts of negative yielding debt to start rising again," said State Street's Graf.

"For sovereigns, this may be a bit more drawn out, given explosion of fiscal deficits – but again, with QE likely to come in unlimited amounts for the foreseeable future, I wouldn’t call this a turning point."


(Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli and Sujata Rao; editing by Larry King)