Investors lose $24 billion a year on negative-yielding bonds
Bonds issued by governments around the world that yield less than zero result in investors losses of about $24 billion a year, according to Fitch Ratings.
The rise of bonds, where lenders are essentially paying borrowers to take their money, is expected to have broad repercussions on financial institutions’ profits and keep demand for U.S. Treasurys high, said Robert Grossman, managing director of the macro credit research unit at Fitch, in a report.
As of April 25, so-called negative-yield bonds totaled $9.9 trillion, which comprises $6.8 trillion in long-term bonds and $3.1 trillion in short-term debt, according to Fitch.
Banks, insurance companies, pension funds, and money-market funds, which are key players in the government debt market, are pressured to take on greater risks to make up for negative yields, Grossman said. Some banks have already started to pass on the increased cost to their customers, he added.
“Despite gains booked on many of these securities over the last several years, yields for these [financial] institutions’ portfolios have fallen sharply, and their ability to maintain profits has been reduced,” Grossman said.
Fitch said 14 governments have at least one benchmark bond yielding below zero and these countries combined have $15.4 trillion in bonds outstanding with an average yield of 13 basis points. By comparison, the trillions in negative-yield bonds are yielding minus 24 basis points, which is equivalent to $24 billion annually.
Negative interest rates are viewed as a controversial and unconventional strategy, which has been employed by Japan and parts of Europe to spark otherwise sluggish growth and lift stubbornly lower inflation.
“Japanese debt accounts for 66% of negative-yielding debt world-wide, with $6.5 trillion worth of fixed-rate debt obligations yielding less than 0%,” said Grossman.
Japan’s central bank now owns about 32% of outstanding Japanese government bonds, almost double the Federal Reserve’s 17.2% ownership of Treasurys, data from Fitch and Jeffries show.
The diminished returns from JGB and European sovereign bonds are likely to continue feeding investors’ appetite for U.S. Treasurys and result in low rates for a sustained period, Grossman said.
“This could also complicate any attempts by the Fed to tighten policy by raising short-term interest rates later this year,” he said.
Analysts at Bank of America Merrill Lynch recently estimated that negative-yield bonds accounted for nearly one fourth of the global bond market and are likely to continue growing as governments seek novel means of stimulating their economies.
Still, despite soft patches in the U.S. economy, the Federal Reserve won’t have to resort to negative rates soon as the outlook on growth and inflation are generally optimistic, said Thomas Simons, senior money-market economist at Jefferies LLC.
“Some day in the future we will look back on this time as a very bizarre episode that produced nothing useful,” he said.