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The global market for negative-yielding debt is worth a colossal $10 trillion

• http://www.businessinsider.com

The amount of debt globally yielding below zero has passed $10 trillion (£6.9 trillion) for the first time in history, thanks to a combination of "unconventional monetary policies, regulatory risk mitigation by banks, and a flight to safety in global financial markets," according to the credit-ratings agency Fitch.

Fitch says the amount of negative-yielding debt climbed by 5% in May, reaching $10.4 trillion by May 31 — a record high and up from $9.9 trillion in the previous month. The figure contains $7.3 trillion in long-term debt and $3.1 trillion of short-term debt.

Essentially, negative-yielding debt is debt that if held until maturity by an investor will actually cost the owner money. People invest in this kind of debt because they usually know there is very little risk of the debtor defaulting, as the debtors are generally governments of large, stable economies.

Because negative bonds guarantee a loss, investors will buy them only if they are scared of putting their money elsewhere. They imply that risk elsewhere is even worse than a bond that is guaranteed to lose a predictable amount of money. So when the amount of money being put into this kind of debt rises, it generally signals a lack of confidence in the global economy.

"Unconventional monetary policies, regulatory risk mitigation by banks, and a flight to safety in global financial markets have all contributed to the ongoing rise in the amount of sovereign debt trading with a negative yield," Fitch analyst Robert Grossman wrote in a report out on Thursday.

The rush into sovereign debt, by governments to encourage lending and by investors to find safer assets, has helped to raise bond prices and pushed down yields. The increase in negative debt has been fueled in large part by increasing bond prices in the eurozone's three largest economies, and Japan, which accounts for by far the highest amount of negative-yielding debt.

"Central-bank actions are certainly a part of it, but the global search for yield, the desire to find high-quality securities, is part of what is going on here," Grossman, one of the compilers of Fitch's debt report, said.

Here's an extract from Fitch's report:

There were no major shifts in the distribution of debt among the 14 countries with negative-yielding debt, with Japan still by far the largest source. Modest declines in Japanese, Italian, German and French sovereign yields during the month drove the $0.5 trillion increase in the total stock of negative-yielding debt.

Higher amounts of Japanese and Italian sovereign securities with sub-zero yields were the biggest contributors to the monthly changes. Yields on some Italian securities with maturities between 1.5 and 3 years flipped to negative from positive, and long-dated Japanese securities have gone further into negative territory since April 25. Core Eurozone yields were driven lower as weak inflation and manufacturing data, as well as the expansion of the ECB's bond-buying program, continued to fuel demand for Eurozone sovereign debt.


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