$9 Trillion Of Negative Rate Sovereign Debt Driven Frantic Global Scramble For Positive Yield

By Alexandra Scaggs, Eliza Ronalds-Hannon & Claire Boston

Whether you’re a government or a company in Europe, the U.S. or Asia, it’s a great time to sell bonds. Around the world, bidders are snapping up almost anything with a yield.

Auctions of long-term debt by the U.S., Spain and Portugal all drew strong demand Wednesday, with the Treasury sale seeing unprecedented appetite from one class of investors. Japan sold 30-year notes Thursday at a record-low 0.319 percent. Buyers are also clamoring for company bonds, in a week that may be the busiest this year for corporate borrowing in the U.S. and Europe.

-1x-1 (11)

The driving force behind the bond binge is the growing universe of negative-yielding securities, which has expanded above $9 trillion since the European Central Bank and Bank of Japan cut interest rates below zero. JPMorgan Chase & Co. predicts that, with the supply of debt falling, conditions in the global bond market will be so favorable in 2016 that record-low yields are probably in store.

“In a yield-starved world, where a significant percentage of global government debt is yielding zero or something less, investors are reaching for yield by extending maturities, buying credit, or some combination thereof,” said Colin Lundgren, head of fixed income in Minneapolis at Columbia Threadneedle Investments, which managed about $470 billion as of Dec. 31.

Risk-Reward

On the one hand, the reach to pad returns shows that central banks’ efforts to push investors into riskier investments have been successful. But the phenomenon also means buyers are increasingly vulnerable to corporate defaults, or to rising interest rates. For the latter, that’s because debt with higher duration, such as obligations with longer maturities, suffers steeper losses when rates rise.

The broad global bond market’s effective duration reached an all-time high this month, according to Bank of America Merrill Lynch Indexes. That leaves investors at risk if views on the path of the Federal Reserve change. Traders are essentially counting out another Fed interest-rate increase for the time being -- futures don’t fully reflect the next hike until mid-2017, according to data compiled by Bloomberg.

-1x-1 (12)

“In the very near-term, rightly or wrongly, no one is really afraid of the Fed,” Lundgren said. It’s increasingly important to “do the research and make sure there is value by extending maturities or buying credit. This too shall pass, but maybe not anytime soon.”

Treasuries Frenzy

The demand is buoying government borrowers. Fund managers, global central banks and other institutions piled into an auction of 10-year U.S. debt Wednesday. Those who bought through primary dealers, classified as indirect bidders, picked up a record share of the sale. The benchmark notes were sold at the lowest yield in more than three years, at levels that firms including Goldman Sachs Group Inc. deem expensive.

“There’s clearly a lot of demand any time you can get something with positive yield,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. in New York. “If you’re a buy-and-hold investor, you might as well -- every chance you get.”

The Treasury Department plans to sell $15 billion of 30-year bonds Thursday.

A pair of European countries took the opportunity to lock in low long-term borrowing costs. Portuguese bonds outperformed most of their euro-area peers Wednesday after the nation exceeded its target at a sale of 10-year securities.

Ultra-Long Fervor

Spain sold 50-year bonds, joining the trend of governments offering ultra-long European debt, seen in France and Belgium last week. Orders for Spain’s securities surpassed 10.5 billion euros on 3 billion euros of issuance. Italy’s debt agency said in a statement Tuesday that it was evaluating demand for a possible 50-year sale.

Japan had no problem selling 30-year bonds Thursday even after they were called the “most overpriced security on the face of the Earth” by hedge fund executive Adam Fisher.

All Japanese debt maturing in 15 years or less has negative yields. The nation’s money managers bought a net 4.95 trillion yen ($45.5 billion) of U.S. sovereign bonds in March, a record in data compiled since 2005.

In the U.S., companies with investment-grade ratings sold $7.8 billion of debt Wednesday, bringing total issuance past $41 billion this week. It’s on pace to approach or even exceed the $63 billion raised in the five-day period ended Jan. 15, the busiest week this year. In Europe, American companies including Johnson & Johnson and Kraft Heinz Co. brought multibillion dollar deals in euros, putting corporate debt issuance there within reach of a weekly record.

“There is a lot of cash ready to be put to work,” said David Brown, head of global investment-grade credit at Neuberger Berman, which manages $243 billion. “People aren’t afraid to spend money on these new deals right now.”

Source: Investors Fleeing $9 Trillion of Negative Yields Fuel Bond Binge - Bloomberg

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access