The global market for negative yielding debt is worth a colossal $10 trillion

The amount of debt globally yielding below zero has passed $10 trillion (£6.9 trillion) for the first time in history, thanks to a combination of “unconventional monetary policies, regulatory risk mitigation by banks and a flight to safety in global financial markets,” according to credit ratings agency Fitch.

Fitch says that the amount of negative yielding debt climbed by 5% in May, reaching $10.4 trillion by May 31, up from $9.9 trillion in the previous month, and a record high. That figure was made up of $7.3 trillion in long-term debt, and $3.1 trillion of short-term debt.

Essentially, negative yielding debt is debt that if held until maturity by an investor, will actually cost the owner money. People invest in this kind of debt as they usually know that there’s very little risk of the debtor defaulting, as they are generally governments of large, stable economies.

Unconventional monetary policies, regulatory risk mitigation by banks and a flight to safety in global financial markets have all contributed to the ongoing rise in the amount of sovereign debt trading with a negative yield,” wrote Fitch analyst Robert Grossman in a report out on Thursday.

The rush into sovereign debt — by governments to encourage lending and by investors to find safer assets — has helped to raise bond prices and pushed down yields. The increase in negative debt has been fuelled in large part by increasing bond prices in the eurozone’s three largest economies, and Japan, which accounts for by far the highest amount of negative yielding debt.

“Central bank actions are certainly a part of it, but the global search for yield, the desire to find high-quality securities is part of what is going on here,” said Grossman, one of the compilers of Fitch’s debt report said.

Here’s an extract from Fitch’s report:

There were no major shifts in the distribution of debt among the 14 countries with negative-yielding debt, with Japan still by far the largest source. Modest declines in Japanese, Italian, German and French sovereign yields during the month drove the $0.5 trillion increase in the total stock of negative-yielding debt.

Higher amounts of Japanese and Italian sovereign securities with sub-zero yields were the biggest contributors to the monthly changes. Yields on some Italian securities with maturities between 1.5 and 3 years flipped to negative from positive, and long-dated Japanese securities have gone further into negative territory since April 25. Core Eurozone yields were driven lower as weak inflation and manufacturing data, as well as the expansion of the ECB’s bond-buying program, continued to fuel demand for Eurozone sovereign debt.

Global negative yielding debts have increased rapidly since Sweden became the first government to take its base interest rate below zero in early 2015. A number of other central banks, including those in Switzerland, Denmark, Japan, and the ECB, have now followed suit, and that has pushed up negative yielding debt massively.

The amount of negative debt will most likely increase, as few of the central banks with rates below zero look as though they will come back above zero any time soon. On Thursday, ECB president Mario Draghi effectively suggested that he could push rates even further into negative territory. The bank’s base rate is currently -0.4%.

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