Negative-yielding government debt has risen to more than $10 trillion for the first time in history, pushing exchange-traded fund investors into corporate bonds and other alternatives as they look for extra income.
Ursula Marchioni, Chief Strategist, iShares EMEA at BlackRock.
According to new data from Fitch Ratings, central bank stimulus like quantitative easing and cutting interest rates, as well as European regulations requiring banks to up their capital buffers, has fuelled a large investor appetite for safer, sovereign debt.
The main culprits of the $10.4 trillion negative-yielding debt are rising bond prices in Italy, Japan, Germany and France, but the trend has spanned widely across 14 countries, from short-dated debt ($3.1 trillion) to long-dated debt ($7.3 trillion), and from seven-year German Bunds to 10-year Japanese bonds.
It has seen ETFs tracking sovereign debt rally as prices go up and yields fall. The £534 million iShares Global Government Bond UCITS ETF (LSE: IGLO) is up 10.6% over the last year alone in US dollar terms, racing ahead of global equities. The iShares Core MSCI World UCITS ETF (LSE: IWDA) is down 4.7% over the same timeframe.
Specific country examples further illustrate this trend. The iShares Germany Government Bond UCITS ETF (LSE: IDEU) is up over 6% in the last year in euro terms, while iShares’ French bond equivalent (IFRB) is up 5.9% over the same time horizon. In Germany, the iShares ETF (SITB) has risen a remarkable 13.44% in 12 months in sterling terms.
Japan was by far the largest source of negative-yielding bonds, according to Fitch Ratings, as the Bank of Japan has driven interest rates below zero. The one ETF in Europe to track Japanese bonds, the db X-trackers II Markit iBoxx Japan Sovereign UCITS ETF (XJSE), is up a whopping 25.08% in the past year in euro terms.
As a result of this global phenomenon, ETF investors are piling into alternative sources of yield.
“As negative yields on government bonds reach record lows, investors are increasingly relying on fixed income ETPs – especially corporate bond exposures – to generate yield on their portfolios,” said Ursula Marchioni, chief strategist, EMEA at iShares.
ETF data from BlackRock shows that from 1st May – 27th May global investors piled $9.2 billion into fixed income, with $2.5 billion into investment grade corporate bonds, $3.2 billion into multi-sector and broad exposures and $1 billion into emerging market debt. More cautious investors placed $800 million with inflation-linked paper.
Global cumulative flows for 2016 into fixed income ETFs now stand at $61.4 billion – the best year to date cumulative rate in the history of the asset class, the data found.
But it’s not just sovereign bonds that are feeling the pinch on yield. Data from Tradeweb shows the amount of corporate bonds with a negative yield has risen to $380 billion.
There is little evidence this trend of low yields will reverse in the short term. This week, the European Central Bank left its main deposit interest rate for bank reserves unchanged at minus 0.4%.
But Sameer Samana, a strategist at Wells Fargo Investment Institute, told the Financial Times that as the oil price stabilises and central banks hit the limits of monetary easing, that will cap the rise of negative yields.