In One Chart: Global pile of debt at negative yields dips below $3 trillion: Deutsche Bank

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Central banks around the world have taken a huge bite out of the mound of negative yielding debt, by talking about plans to raise interest rates and tighten financial conditions to fight high inflation in recent weeks.

The once towering $18.5 trillion peak pile of global debt at negative yields fell this week below $3 trillion, its lowest level since December 2015, according to a research note from Deutsche Bank.

For government-issued bonds, the share dipped to slightly under 8% of the total (see chart), down from a “stunningly crazy peak of around 40% in September 2019,” Deutsche Bank strategist Jim Reid, wrote in a Friday client note.

Under $3 trillion of global bonds have negative yields, down from a near $19 trillion peak

Deutsche Bank Research

The share of negative yielding debt issued by corporations dipped to less than 0.1%, for the first time since hitting zero in 2020 as pandemic lockdowns took hold and credit spreads blew out.

“Before that you’d have to go back to February 2015 to find a smaller % of global corporate bonds with a negative yield,” Reid wrote.

Investors who buy bonds with subzero yields are, in effect, paying for the privilege to hold an investment, but the costs can be more than offset if the security’s price rises. Most bonds also pay a coupon, sometimes twice a year, providing investors with steady income.

Read: Negative-yielding bonds do not mean negative-yielding bond funds (2019)

U.S. Treasury bond yields have climbed sharply in 2022 as Federal Reserve officials have begun to pencil in a more aggressive path of rate hikes. The 10-year Treasury rate
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2.483%

was around 2.47% on Friday, on track for its biggest weekly rise since Sept. 2019.

Treasury yields plunged early in the pandemic as the U.S. central bank reverted to easy-monetary policies, although the bulk of the world’s negative yields were to be found in Europe.

Should the European Central Bank hike its rates twice this year, “as we expect, then its not impossible that by the end of the year the amount of total negative yielding global debt (including governments) will be negligible again,” Reid wrote. “This will then end, for all extents and purposes, a strange 7-8 year experiment.”

Inflation has been climbing in many countries in the wake of the pandemic, forcing central banks to raise interest rates, particularly with U.S. oil prices
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+0.65%

above $113 and the global
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-0.72%

crude benchmark above $120 a barrel on Friday, but policy makers also face the threat of a slowdown in economic growth as a result.

“The next hurdle,” according to Reid, would be to get global inflation in check so that “the percentage of global bonds that have a higher yield than inflation is minuscule.”

Read: Biggest share of Americans since 1940s say their financial health will get worse in year ahead

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