Fitch: Widening Pool of Negative-Yielding Debt Squeezing Sovereign Investors
OREANDA-NEWS. Growth in the amount of sovereign debt trading at negative yields is putting increasing pressure on investors that depend heavily on income from government securities, according to Fitch Ratings.
The global supply of long- and short-term sovereign securities yielding less than zero now nears $10 trillion, constraining the ability of banks, insurers and other sovereign investors to generate fixed-income returns.
"Unconventional monetary policies in Japan and Europe have pushed sovereign yields to new lows, limiting investors' ability to maintain profits through investment income," says Robert Grossman, Managing Director, Macro Credit Research.
The total amount of negative yielding government debt stood at $9.9 trillion ($6.8 long-term and $3.1 short-term) globally as of April 25, 2016. This debt currently yields negative 24 basis points (negative $24 billion) annually. If historical rates were available today, the same securities would have yielded 1.23% ($122 billion) using 2011 yields, and 1.83% ($180 billion) using 2006 yields.
The desire to generate better returns could lead banks, insurance companies, money funds and other investors to lengthen maturities or lower the average credit quality of their portfolios, contributing to higher risk in the global financial system. One possible implication of a growing stock of negative yielding debt is increased demand for higher-yielding government securities like U.S. Treasuries, which could keep long-term yields low, potentially complicating the Fed's efforts to raise short-term interest rates later this year.
Japan accounts for 66% ($6.5 trillion) of the total outstanding negative yielding debt, bolstered by the BOJ's negative rate policy and increased purchases of Japanese government bonds. The remainder of negative interest rate debt resides in Europe.
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