Source: Golden Ten Data
Central banks are turning hawks, ending large-scale asset purchases and raising interest rates. As a “laggard”, the European Central Bank may be powerless to catch up?
Since the beginning of this year, central banks around the world have turned to hawkish policies and are bound to end the era of negative interest rates. The number of negative-yielding bonds worldwide has dropped by $11 trillion.
Bond prices have tumbled this year as central banks end large-scale asset purchases and raise interest rates in their fight against soaring inflation, pushing bond yields in many large economies to their highest levels in years.
According to the Bloomberg Global Aggregate Bond Index, the scale of global negative-yielding bonds has fallen sharply to $2.7 trillion, the lowest level since 2015, from more than $14 trillion in mid-December last year. For many large investors, the complete elimination of negative yields would mark a return to normalcy.
Mike Riddell, senior portfolio manager at Allianz Global Investors, said:
Central banks tried to get ahead of the inflation shock, but it was too late, so bond markets priced in a sharp rise in interest rates.
Negative yields, once considered unimaginable and a novelty at the time, have become an established feature of global markets. Negative yields mean high bond prices and low interest payments, and if investors hold the bond until maturity, they also pay interest to debtors. It reflects a belief that central banks will keep interest rates at rock-bottom levels. This belief has been ingrained in Japan and the euro zone’s massive debt in recent years.
However, that assessment has changed dramatically in recent months, especially in the euro area. The European Central Bank on Thursday reiterated plans to end its bond-buying program this year, with traders betting that interest rates will rise to zero for the first time since December 2014.
The end of ultra-low or negative yields is a “double-edged sword” for bond investors, Riddle said:
On the one hand, people lost money as the prices of their bond holdings plummeted. On the other hand, a positive risk-free rate means future returns can be better.
It would be “good news” for investors such as pension funds that need to hold large amounts of safe assets such as government bonds, he added . They also need to earn enough returns to meet future payments.
Salman Ahmed, global head of macro at Fidelity International, said the dwindling stock of negative-yielding bonds also reflects high inflation levels, prompting investors to demand greater compensation for rising prices. He said:
Yes, nominal yields are rising, but long-term investors should care about real returns. What matters is the inflation rate, which is very high right now.
The euro zone has been the main driver behind the decline in negative-yielding bond trading recently. In December, the euro zone held more than $7 trillion in such bonds, including all German government bonds. That number has now dropped to just $400 billion. However, the Bank of Japan has so far refused to tighten monetary policy as much as other countries, and Japan now issues more than 80% of the world’s negative-yielding bonds.
But unless the ECB delivers on the rate hikes already priced in by markets, negative-yielding bonds in the euro zone could multiply again. Given the threat to the region’s recovery from the Russian-Ukrainian conflict and the resulting rise in energy prices, the ECB will struggle to raise rates significantly , Ahmed said. Ahmed added:
I think the ECB missed the window for policy normalization as the growth shock from Ukraine will have more severe consequences for Europe and in our view Eurozone rates are not going back to zero this year which means that negative yielding bonds are not will disappear.
Editor/Corrine
This article is reprinted from: https://news.futunn.com/post/14612758?src=3&report_type=market&report_id=203330&futusource=news_headline_list
This site is for inclusion only, and the copyright belongs to the original author.