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Home > Coronavirus > Negative yields increase as global coronavirus risk proliferates

Negative yields increase as global coronavirus risk proliferates

Feb. 27, 2020 by Joseph Brusuelas

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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.

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Filed Under: Coronavirus, Economics Tagged With: coronavirus, debt, Joe Brusuelas

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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