The global stock of negative-yielding debt is shrinking rapidly in 2018.
A hallmark of the post-crisis policy regime, sub-zero yields signaled both investors’ persistent fear of the deflation boogeyman and expectations of continual support from policymakers. The willingness of the Fed, the ECB and the BoJ (not to mention the BoE and the Riksbank) to plow trillions in freshly-printed dollars, euros, and yen into everything from bunds to corporate credit distorted the supply/demand picture beyond recognition, effectively underwriting the bond rally and ensuring that credit spreads ground inexorably tighter as investors chased down the quality ladder in a frantic search for any semblance of yield.
In the new year, that dynamic is reversing – and quickly. Against a backdrop of synchronized global growth and signs that central banks “mean it this time” when it comes to normalizing policy, the global stock of negative-yielding debt has shrunk by some $1 trillion in the first 8 trading days of 2018:
At roughly $7.3 trillion, the pool of sub-zero-yielding fixed income is the smallest it’s been since July.
Good news? Well, I suppose that depends on one’s perspective. If you believe the market is prepared for a return to the “old” normal, then I suppose this is a welcome sign. If, however, you’re concerned that the return of two-way markets is a dangerous proposition in a world where, to quote Citi, “trades and strategies which explicitly or implicitly rely on the low-vol environment continuing, are becoming more and more ubiquitous,” well then the jury is still out.