Japan‘s surprise decision to cut interest rates has reverberated across global markets, pushing the universe of government bonds that trade at negative yields to a record $5.5tn writes Elaine Moore. Fears for economic deterioration and increasingly abnormal policies adopted by global central banks to ward off the threat of deflation have resulted in a bizarre scenario in which investors pay governments to hold their money.
Figures from JPMorgan show that negative rates, once considered only theoretically possible, now account for one-quarter of the index for government bonds. On Friday, yields on Japanese, French and German bonds hit record lows after the Bank of Japan decided to adopt negative interest rates, just over one week after governor Haruhiko Kuroda ruled the policy out.
In Europe, the first region to adopt negative interest rates, around half of all government bonds carry sub-zero yields, led by Germany, Finland and Switzerland, where negative yields extend all the way to bonds with a 10-year maturity. Government bonds are traditionally the home of risk-shy investors but central bank bond-buying programs and concerns of global deflation have resulted in a worldwide rally and unprecedented low yields.
While holding bonds guaranteed to lose money sounds counter-intuitive, negative yields are attractive to investors who are pessimistic about the outlook for the global economy and believe inflation will remain ultra-low or central bank action will keep driving yields down.