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Saturday / December 15.

Is negative-yielding debt seeing a bond exodus?

$1tr worth of paper exited negative-yielding zone in first 8 trading sessions of 2018

London: As the global bond market comes to terms with the unwinding of quantitative easing from the US to Europe, it’s cutting inventory of the assets that bear the hallmark of a decade of distortion: negative-yielding debt.

In the first eight trading sessions of the year, the pool of bonds with sub-zero yields has shrunk by about $1 trillion (Dh3.67 trillion) to $7.3 trillion, the smallest since July, signalling an uptick in growth and inflation prospects that’s helping to normalise bond markets around the world.

Buying bonds with negative yields made sense when investors anticipated deflation and the potential to make capital gains as QE drove rates lower. But with the world economy set to enjoy its strongest year since 2011, factories struggling to keep up with demand, and inflation expectations steadily rising, central banks have the room to withdraw support and normalise rates.

Minutes of the European Central Bank’s December meeting on Thursday showed policymakers are considering a hawkish shift in their communication in the early months of 2018. Days before, the Bank of Japan trimmed longer-dated bonds in an asset-purchase operation, though officials said it shouldn’t be taken as a new sign they’re planning to exit stimulus.

Policymakers in Europe have halved the ECB’s bond-buying programme, leaving it open as to whether they would carry on after the targeted end in September. And stimulus looks set to last even longer in Japan. Governor Haruhiko Kuroda this month emphasised the BoJ is far from its 2 per cent inflation target, highlighting the nation’s “deflationary mindset.”

via GN