Late last month, BofA’s Barnaby Martin marveled at a set of “mind-boggling” numbers from the world of negative-yielding debt, which has recently expanded beyond the $12 trillion threshold as bonds rally on the back of persistent global growth concerns, subdued inflation expectations and the promise of lower rates and more accommodation from central banks.
“Around 85% of German government debt now yields below zero (and ~60% of German quasi-sovereign debt is negative too)”, Martin wrote, adding that nearly 80% of French covered bonds are negative-yielding, while in Japan, 70% of sovereign bonds yield less than zero.
This week brought more eye-popping moves in bonds. 10-year yields in Italy fell below 2% for the first time since the May 2018 BTP meltdown, for instance, and rallied further on news that Rome will apparently dodge budget disciplinary proceedings. It was the best week for Italian bonds in a year.
That is an astonishing five-week rally. Meanwhile, 2-year yields in Italy fell below zero, underscoring just how desperate the hunt for yield has become.
Bund yields rose on Friday as bonds sold off following the blockbuster US payrolls report, but multiple desks see 10-year German yields falling to at least -50bp by year end. This week, yields pushed below the ECB depo rate, further cementing the “Japanficiation” narrative.
Little wonder, given the scarcity of IG paper yielding more than 1% in Europe, that Saudi Arabia jumped at the opportunity to tap what amounts to free money.
In a new note dated Friday, BofA’s Martin picks up where he left off. Documenting the insanity further, he writes that 30-year US yields are near the Fed Funds rate, meaning the entire Treasury curve is close to inversion on that score. He also notes that in the UK, “10yr Gilt yields returned the favor, falling below the BoE’s Bank Rate for the first time since late 2008”, before flagging sub-zero yields at the front end of the Italian curve and welcoming Belgium to the “negative club”.
As BofA’s European credit team has emphasized time and again, negative yields simply represent a tax on risk free assets and thereby a rubber stamp on investment grade and high yield credit, as the hunt for yield drives money out the risk curve and down the quality ladder. In fact, if you extrapolate from the last six weeks of € IG flows, you end up envisioning an outright mania.
“The backdrop of ‘financial repression’ – in the form of $12 trillion of negative yielding bonds – is unambiguously bullish for European credit, in our view [and] we see signs already that this is fueling a mammoth reach for yield across markets”, Martin says.
So, who’s buying?. The answer is everyone. Specifically, Martin fingers “new dedicated long-only credit mandates, more Japanese buying of Euro credit, and more cross-asset money being switched to corporate bonds”.
But that’s not all. It’s also likely that corporates are themselves buying corporate bonds, because they can’t get any yield on cash. “Deposit rates for non-financial corporates continue to head lower across the Eurozone, and at a much faster pace than for household deposit rates”, BofA observes.
The visual in the right pane captures what is perhaps the ultimate expression of NIRP-ian™ insanity – negative-yielding high yield bonds. “10 Euro-denominated high-yield bonds now yield below zero, a mixture of both callables and bullets”, Martin notes.
If you’re wondering whether the whole concept of a “high” yield bond yielding less than zero is as silly as it sounds, the answer is yes. Martin rather dryly calls it “an unfortunate oxymoron”.