The volume of long-term sovereign debt carrying negative yields increased significantly in the three months ended May 31, spurred by political uncertainty around the French election and a weaker US dollar, after falling somewhat in the previous three months. And while that’s gloomy news for investors in longer-term securities, corporates seeking to park cash in the eurozone and Japan—the negative rate jurisdictions—face even harsher choices.
“Investors in short-term sovereign securities are facing additional challenges in these countries when attempting to preserve capital without taking on incremental risks,” said Jonathan Boise, association director at Fitch Ratings. “While long-term yields are above their historic lows, yields on six-month notes are below negative 50 basis points in France, Germany, Belgium, Netherlands, and other European countries.”
Fitch noted in a June 13 report that the amount of global negative-yielding sovereign debt outstanding rose “substantially” to $9.5 trillion as of May 21, up from $8.6 trillion on March 1. The rating agency attributed the increase in negative-yield debt to uncertainty about the outcome of the French election and a weaker US dollar.
“Heightened bond market anxiety related to the French presidential election caused a rise in French sovereign yields earlier in the year; however, yields declined leading up to and following the victory of Emmanuel Macron,” the report says. “As a result, the amount of negative-yielding sovereign debt outstanding rose to $1 trillion at the end of May from about $750 billion March 1.”
In addition, changes in the major issuers’ currency exchange rates explain about $400 billion of the increase in negative-yielding debt since March 1, and lower global yields contribute to the remaining $500 billion of the $900 billion increase, Fitch says. The report notes that the euro/USD exchange rate rose to $1.124 as of May 31 from $1.055 on March 1, and the USD also weakened relative to the Japanese yen.
Fitch says the amount of negative-yielding debt had been declining since November 2016, reaching a low among Fitch study periods in March of $8.6 trillion. While somewhat higher yields have alleviated some pressure for investors, challenges remain as yields in many developed economies remain near historic lows.
Insurance companies and other buy-and-hold fixed income investors, potentially including corporates who split their cash among different-maturity buckets will face challenges as sovereign debt matures because they will have to reinvest the proceeds into assets that yield far less. For example, Fitch says, the 10-year sovereign yield in Germany was positive 31 basis points as of May 31, higher than its sub-zero yield in mid-2016 but still much lower than the 4% coupon carried by the 10-year issue maturing in 2018.
“Among countries with negative-yield debt, $900 billion of debt with original maturities of [seven or more] years is maturing in 2017 and 2018,” Boise said.
While negative-yielding debt is the most problematic for corporates investing cash, there’s also plenty of debt yielding less than an anemic 0.5%. Boise said there was “$12.4 trillion of debt with yields less than 0.5% as of May 31, 2017, compared to $9.5 trillion with yields less than 0%, giving a total of $2.9 trillion of debt from these countries with yields between 0% and 0.5%.”