Bond market wobble shrinks global pile of negative yields

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Late-December outbreak of optimism on global trade talks helps cool government bonds

An end of year sell-off in global bond markets has helped shrink the pile of negative-yielding debt by $6tn since the summer peak, in a sign that recession fears are abating.
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Tentative signs of an emerging US-China trade deal last week fed a drop in bond prices that pushed Japan’s 10-year yield above zero for the first time since March, while 10-year US yields climbed to a five-week high of 1.92 per cent. Yields in the eurozone also rose sharply.

The market moves pushed the total amount of negative yielding debt from a peak of $17tn in the summer to just above $11tn — the lowest since June.

An outburst of guarded optimism on trade talks has dulled the appeal of government debt that investors treat as a safe retreat in times of stress.

The drop in prices has surprised some fund managers who had been betting on ever-lower yields. But analysts are reluctant to see it as a sign that the bizarre phenomenon of bonds guaranteeing a nominal loss for investors is coming to an end.

“Three factors have come together to push yields higher despite reaffirmation from central banks of the ultra-low for longer rate regime: less bad global growth indicators, de-escalation of trade tensions and a technically offside market with too many looking for a further cascading compression of yields,” said Mohamed El-Erian, chief economic adviser at Allianz.

During the summer, a wave of nerves over the global economy generated a huge bond rally that pushed the value of debt around the world trading with sub-zero yields to a record level. The tally has receded as investors scale back their bets that a recession is on the way.

Some investors expect bonds to resume their rally next year, particularly as US-China trade talks are prone to hiccups, but they are reluctant to buy during a period of relatively light trading volumes during the Christmas period, which could exaggerate market swings.

“It doesn’t make sense to get in the way of this move,” said Mohammed Kazmi, a London-based portfolio manager at Swiss private bank Union Bancaire Privée. “Market participants are probably going to wait until next year to reallocate to bonds. We don’t think anything has changed. Big central banks are on hold and if anything there’s a more of a risk of them cutting again.”

Some investors have grown increasingly uncomfortable about holding debt with negative yields, particularly given the growing backlash against the use of sub-zero interest rates by central bankers. Sweden’s Riksbank last week ditched negative rates as it lifted it benchmark rate to zero even despite signs of a weakening economy.

“Although the move was in line with expectations, this sets a potential precedent for other central banks to similarly move away from negative rates,” said Deutsche Bank analyst Jim Reid.

A brighter outlook for the global economy resulting from a trade truce could further dim the appeal of holding negative-yielding debt, which guarantees a nominal loss if it is held to maturity.

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