Negative-yield debt is making a strong comeback in the economy as rising trade tension with China and issues at the Gulf hold investor sentiment hostage.
Data shows worrying trends
New Barclay’s data shows that bonds trading at sub-zero levels has now reached the $12 trillion mark on a global scale. As concerns about global trade and the world economy at large are becoming grimmer, expectations towards the monetary policy are shifting quickly. Nordea Market’s fixed-income strategist Andreas Steno Larsen said that the market rates have fallen “off the cliff” recently.
Last week, German 10-year Bonds were sold at a record-low yield of minus 0.24%, making investors lose money. Medium-term debts by Switzerland, Japan, Denmark, and the Netherlands are also in the sub-zero territory right now. Inflation has remained tepid, which is adding to the investors’ woes.
While two of the largest economies in the world- the US and China, are in the middle of a trade war, fresh issues arose in the Middle East. Two oil tankers were attacked in Oman last week after which the safety of debt looks more appealing, noted UniCredit economist Tullia Bucco.
As the oil industry is dragged into the global trade issues, prices were expected to rise after the oil tankers were hit. However, they moved up by only $1 per barrel and continue to slide, leaving traders scratching their heads. The global outlook on economic growth is shifting towards the negative, which means that supply chain disruptions in the oil sector will fail to drive prices higher.
What will the Federal Reserve do?
Economists expect that the US Federal Reserve and other central banks will hold their rates, some analysts forecast that the Feds could cut rates in July. The largest bond manager, Pimco, expects the Feds to cut interest rates by 0.5 percentage points next month. It is a more aggressive expectation compared to the usual 0.25 percentage point cut. The US and China will have to stop or at least scale down their trade tensions during the G20 meeting later this month. If not, the Feds could implement their cuts.
The European Central Bank indicated that it will continue to hold the interest rates till mid-2020. Note that the interest rates are already at historic lows in Europe and the policymakers are planning to bring further stimulus to the economy. They could be focused on pushing the manufacturing sector, which is already in trouble in the Eurozone.