One of the major narratives inside the global fixed income market over the past year was the rise of negative-yielding debt, which peaked at $17 trillion during the most intense phase of the U.S.-China trade conflict in August 2019. As fears of a wider trade conflict abated, the issuance of global negative-yielding debt eased back to roughly $10 trillion in early 2020. However, with the outbreak of Covid-19 in China in late December, a global safe-haven move by investors started in earnest around Jan. 14; as a result, negative-yielding debt has jumped back to $13.96 trillion as of Feb. 26.
In the near term, investors should expect an additional increase, along with falling yields across the debt maturity spectrum. As of this writing, the closely watched, policy-sensitive yield curve in the U.S. 10-year-less-three-year has inverted; the front end of the curve has become kinked with the effective federal funds rate trading at 1.58% and the two-year at 1.11%. The benchmark U.S. 10-year Treasury note now stands at 1.272% and the 30-year is trading at 1.766%, or near-record lows.
The issuance of negative-yielding debt is a complex phenomenon that is influenced by a variety of factors: unorthodox central bank policies such as negative rates; the market’s push of long-term rates toward or below zero; and general risk aversion to de-globalization. However, it is clear that once China begins to inform its global trading partners of the risks around the breakout of the virus, issuance of negative-yielding debt increased noticeably in a short period.
If the coronavirus continues to spread, and as a result causes a slowing of global GDP growth to below the 2.5% consistent with a recession, investors should anticipate further declines in yields across the spectrum and an increase in the issuance of negative-yielding debt.