Last week, the global stock of negative-yielding debt topped $13 trillion following a mini-“whatever it takes” moment from Mario Draghi, a dovish surprise from the Fed and cautious assessments of the outlook from the BoE and the BoJ.
It was, to quote BofA’s Barnaby Martin, a “dove-fest”.
Between a renewed commitment to accommodation from central banks and the deteriorating outlook for growth and inflation upon which that renewed commitment is predicated, developed market bond yields plunged. 10-year yields in Australia and New Zealand touched record lows, French yields hit zero and it won’t be long before it’s all sub-zero in Germany.
Obviously, that’s a bullish technical for credit, as everyone is driven back out the risk curve and back down the quality ladder in an increasingly desperate hunt for yield.
In a note dated Monday, BofA’s Martin marvels at the sheer scope of it all. To wit:
Front end yields collapsed (the rate cut effect), curves flattened (forward guidance effect), and peripheral spreads and corporate bonds rallied strongly (a QE effect). But not to be outdone by Draghi, Powell and Kuroda injected their own doses of dovishness on the yield curve last week, leaving global government bond yields standing at a paltry 85bp now. It was monetary mania last week…
That it was, and as BofA reiterates, the read-through is that the thirst for yield will grow inexorably stronger.
With safe havens now effectively taxed, money that would have been content to loiter in the risk- free world will find its way to riskier assets. As Martin puts it, “‘tourism’ across financial markets will run rife.” Clearly, corporate credit will benefit from those flows.
BofA proceeds to run through a set of “mind-boggling” numbers.
“Around 85% of German government debt now yields below zero (and ~60% of German quasi-sovereign debt is negative too)”, Matin writes, underscoring what you see in the bottom pane above. Meanwhile, nearly 80% of French covered bonds are negative-yielding, a figure which BofA points out is “up from around 30% at the start of March this year”. In Japan, 70% of sovereign bonds yield less than zero.
Finally, to drive the point home, Martin notes that “just under 50% of Spanish government debt is now also negative yielding [and] despite political tensions, Italy has seen its first govt. bond go negative last week”. Here are a couple of additional visuals that help underscore the point (do take a second to digest the visual in the left pane – it’s pretty remarkable):
What else is there to say?
The bottom line is that you either take risk, or you get taxed. Not much of a choice, really.