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$7.8 Trillion Bond Yields Fall Below Zero
World Economy

$7.8 Trillion Bond Yields Fall Below Zero

Bond investors are taking bigger risks than ever before. Yields on $7.8 trillion of government bonds have been driven below zero by worries over global growth, meaning money managers looking for income are pouring into debt with maturities of as long as 100 years.
Central banks’ policy is exacerbating matters, as the unprecedented debt purchases to spur their economies have soaked up supply and left would-be buyers with few options, Bloomberg reported.
While demand has shown few signs of abating, investors are setting themselves up for damaging losses if yields rise even a little from their rock-bottom levels. Based on a metric called duration, a half-percentage point increase would result in a loss of about $1.6 trillion in the global bond market, according to calculations based on data compiled by Bank of America Corp. This year alone, the danger of owning debt has surged by the most since 2010, raising concerns from heavyweights.
Investors continuing to buy bonds even when they pay next to nothing suggests deep concern over the state of the global economy. This month, the International Monetary Fund warned the threat of worldwide stagnation was rising because economic expansion has been so tepid for so long. It also chopped its 2016 growth forecast to 3.2% from 3.4% in January.
That gloom, combined with more aggressive stimulus measures by the Bank of Japan and the European Central Bank, pushed average yields on $48 trillion of debt securities in the BofA Merrill Lynch Global Broad Market Index to a record-low 1.29% this month. They ended at 1.37% on Friday. It won’t take much of a backup to inflict outsize losses.

Risks Rising
While the implied risk of holding bonds has been building for some time, it surged by the most in more than five years in the first quarter. A big reason for the jump has been increasing demand for long-dated issuance, which has proved a boon for governments that have locked-in borrowing costs for generations.
In April, France issued a new 50-year security for the first time since 2010, while Ireland sold its first ever century bond in March.
Last week, Argentina had little problem finding buyers for its first debt sale since its record $95 billion default in 2001, which included a 30-year maturity.
Although longer-maturity issues have provided investors the opportunity to reap bigger returns, their yields are still rather low by historical standards. Ireland’s €100 million ($112 million) of bonds due in 2116 were issued to yield 2.35%—similar to yields that benchmark 10-year German bunds offered as recently as 2011.
The yield on German 10-year bunds has now slipped to about 0.23%, dragged lower by the ECB’s program of bond-buying, which was expanded to €80 billion a month in March. Meanwhile, in Japan, all of the nation’s sovereign bonds yielded less than 0.4% last week, a result of the surge in the securities since the BOJ introduced a negative interest rate earlier this year.
Big Players Unnerved
Such low yields are unnerving some of the most famous names in the bond market.
Bill Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund, said in a recent tweet that a tiny move in 30-year Japan government bonds could wipe “out an entire year’s income.”
When gains last year pushed benchmark German 10-year yields close to zero, Gross described them as a “short of a lifetime.” That was in the early stages of a selloff which pushed yields up by more than a percentage point in less than two months.
Richard Turnill, the global chief investment strategist at BlackRock Inc., the $4.7 trillion money manager, also said the firm expects losses for long-dated US Treasuries and eurozone debt over five years, while Japan’s biggest life insurers are looking for higher returns in corporate bonds and infrastructure lending in the year ahead, as central bank stimulus clouds the outlook for sovereign debt at home.
Some investors like Allianz Global Investors see it differently. They expect yields of ultra-long bonds to keep declining as weak growth spurs more monetary easing in Europe and Japan and keeps the Fed from raising rates.

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