The Amount of Negative Yielding Debt Is Trending Lower
The amount of negative yielding debt is shrinking and that’s a good sign that the global economic recovery is well underway. While negative yielding debt became prevalent in many non-U.S. countries after the Global Financial Crisis of 2008/09, the amount had surged to over $18 trillion due to the accommodative monetary policies adopted immediately after the COVID-19 shutdowns. As economies recover though and with the eventual normalization of monetary policy, interest rates have started to move higher and now many developed non-U.S. countries have bond yields at multi-year highs.
As seen in the LPL Research Chart of the Day, the amount of negative yielding debt continues to trend lower. As mentioned, at one point there was over $18 trillion of negatively yielding debt but that amount has come down and currently stands at just over $13 trillion. The average yield associated with all that debt has steadily moved higher as well, from -0.40% at its lows to -0.27% now. The majority of negatively yielding debt has a maturity of five years or less so as that debt continues to mature, the amount of negative yielding debt outstanding should fall as well. Interestingly, all that negative yielding debt isn’t just issued by foreign countries. As of May 28, there is nearly a trillion dollars of corporate debt—including some issued by U.S companies—with negative yields. That is, investors are paying some companies to issue debt.
“Foreign investors in U.S. Treasury markets are an important reason we haven’t seen U.S. 10-year yields move even higher,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “As the amount of negative yielding debt trends lower though the incentive for foreign investors to invest outside their home markets decreases, which could put upward pressure on our Treasury yields”
So what does this mean for U.S. fixed income markets? Despite rising yields in their home countries, many foreign investors are still better off investing in the U.S. Treasury market even after taking into consideration the costs to hedge out currency risk. That is, when foreign investors buy U.S. Treasuries, they take on the risk of the U.S. dollar as well. Foreign investors don’t want the currency risk so they will hedge that risk back into their home currency to isolate only the yield advantage of holding U.S. Treasuries. So, even after the added cost of hedging back into their home currency, many non-U.S. investors are able to pick up additional yield over their home country 10-year Treasury, which helps increase returns. As the amount of negative yielding debt decreases though, it becomes less likely that we’ll see the amount of crossover foreign investors needed to help keep our Treasury yields from climbing higher.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
Not Insured by FDIC/NCUA or Any Other Government Agency
Not Bank/Credit Union Guaranteed
Not Bank/Credit Union Deposits or Obligations
May Lose Value
Tracking # 1-05150118