Reasons behind rapid growth of bonds with negative yield

August 23, 2019 11:43
Some market participants expect the Federal Reserve to ease the monetary policy further by the year's end or next year. Photo: Reuters

The outstanding amounts of bonds trading in the negative yield territory have been growing rapidly. This is a rather old situation.

The total market size of negative-yield bonds was around US$5.8 trillion in early October last year, and in less than one year, the number jumped to US$16 trillion. What happened?

In my opinion, there are a few factors.

First, massive capital flowed into the bond market for safety in light of mounting economic downward pressure and the turbulent stock market.

The US-China trade talks have yet to generate any tangible outcome, and this has not only given a heavy shock to global trade but has also weakened business confidence considerably. That has directly affected earnings growth and outlook.

International trade has dropped by 0.4 percent by the end of May. Moderating or negative trade growth usually comes along with cooling economic growth, such as during the 2008 financial crisis and the emerging-market turmoil in 2015 and 2016.

As a result, investors are parking their money in the bond market for fear of further economic weakness, thus pushing down the yield.

Second, the market is expecting central banks to resume their bond-buying schemes sooner or later.

The market liquidity remains fairly tight as shown by the change in the balance sheets of central banks in the United States, European Union and Japan, as well as the change in the foreign exchange reserves of the People’s Bank of China.

Therefore, it’s a legitimate assumption that central banks may take action if the economic growth slows further.

Currently, most of the negative yield bonds are from Europe and Japan.

Given that US bond yields are higher, and the Federal Reserve is expected to further ease the monetary policy, some US Treasury ETFs could be interesting investment targets.

The full article appeared in the Hong Kong Economic Journal on Aug 22

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist