With the historic fall in Japan’s 10-year government bond yield below zero yesterday, the value of government bonds around the world registering negative yields is now above $6tn.
The dramatic expansion of what is effectively a charge on lending to governments comes during one of the most volatile starts to a financial markets year in many decades.
Some observers draw parallels with the stresses that led to the Great Financial Crisis of 2007-08. Banking stocks around the world have taken the strain again in recent weeks.
Just two months ago, there were $3tn of bonds around the world with negative yields, and only 18 months ago there were none, according to JP Morgan.
Negative long-term yields are a headache for relatively conservative investors such as pension funds, whose returns from relatively safe investments are evaporating.
They are also potentially damaging for banks’ balance sheets and net interest margins as yield curves flatten despite negative central bank deposit rates.
And they are a problem for policymakers trying to build confidence in economic recovery and hoping to avoid deflationary expectations becoming embedded amid increasingly brittle global markets.
Andrew Lapthorne, global head of quantitative strategy at Societe Generale in London, said he thinks negative yields are a reflection of how impotent central bank policy has become.
Policy makers have slashed interest rates to zero, or lower in some cases, and pumped up markets with trillions of dollars of stimulus, yet inflation and bond yields have stubbornly refused to rise. In many cases, they’re lower than ever.
“It tells us that policy is not working and that you’re storing up a whole load of grief for the future,” Lapthorne said.
“I’m not convinced the market is particularly happy about the negative rates story. There’s no intermediary. You’re not forcing anybody to do anything, you’re just hoping people take money out of bonds or borrow at a low rate,” he said.
Lapthorne says the US Federal Reserve’s loose monetary policy over the past few years has failed, yet despite that it may even be forced to loosen policy even further with negative rates of their own at some point too.
The Fed last month laid out the framework for its annual banking stability stress tests in which large financial firms will have to show how they would survive a “severely adverse scenario,” including negative yields on short-term US Treasuries.
Financial institutions in Japan and the eurozone have been grappling with negative yields for months now.
Both the Bank of Japan and European Central Bank have cut their deposit rates below zero and could lower them yet further.
