The era of negative yielding debt in Europe is coming to an end


(Bloomberg) — Negative yields are becoming an endangered species, even in Europe, long at the heart of bonds you have to pay to own.

A band of yields in the region turned positive last week as traders accelerated bets on the European Central Bank’s policy tightening to combat record inflation. Money markets now expect the ECB to raise its deposit rate by 50 basis points in 2022 to bring it down to 0% for the first time in almost eight years.

That caused the ECB’s policy-sensitive short-term securities to plunge further, sending five-year bond rates from Germany, the Netherlands and Switzerland well above zero on Friday for the first time in years. With Europe accounting for around half of the global sub-zero stock pool, it is now at its lowest since 2019 and is expected to continue to decline.

“German two-year yields will soon turn positive,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “It’s a runaway train with the next stop at 0%, and it signals that the era of negative yielding debt is nearing the end of the line.”

Negative rates under attack as bond traders see hikes everywhere

More positive returns should relieve investors who have been forced in recent years to take on more and more risk in the search for yield, from emerging markets to junk debt. Some portfolio managers, including central banks, can only buy positive yielding securities.

Here are three charts that show the trend:

The amount of negative-yielding debt fell by almost a third on Thursday alone after the ECB meeting, the biggest drop ever in a single day. That’s just a fraction of its all-time high above 8 trillion euros ($9.5 trillion) during the pandemic.

Market moves over the past week have seen five-year yields from all major European economies turn positive. Next come the three-year maturities, with only countries such as Germany, France and the Netherlands remaining negative.

Negative yields disappear even faster in the world of corporate debt. In the Bloomberg index that tracks investment-grade euro bonds, only around 5% now yield below zero, compared to more than 50% just six months ago.

The average index return is heading towards 1% for the first time since mid-2020. While the moves are weighing heavily on total returns, which are negative this year, the higher yields could help attract new buyers.

“At the height of negative yielding debt last year, some IG sectors were uninvestable because they contained far more negative than positive bonds,” wrote the strategists at Bank of America Corp. led by Barnaby Martin in a note, pointing to retail, technology and automobiles. “As a result, demand for these sectors could return as negative rates fade.”

Next week

There’s a big list of central bank speeches next week that investors will turn to for advice, including appearances from ECB President Christine Lagarde, as well as Klaas Knot and Francois Villeroy. Comments from BOE Governor Andrew Bailey and Chief Economist Huw Pill will also be front and center for any clue to the pace of policy tightening.

  • Bond sales from Germany, Italy and Portugal are expected to total around 11 billion euros, according to Commerzbank AG. The EU is expected to sell debt via banks next week, according to Danske Bank A/S, which forecasts a term of more than 25 years to raise up to €8 billion. The UK is expected to syndicate a new 50-year supply.
  • Eurozone and German economic numbers are mostly second-tier and backward-looking, while the UK releases growth data for the fourth quarter.

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