16% Of Global Government Bonds Now Have A Negative Yield: Here Is Who's Buying It

Tyler Durden's picture

A week ago many were surprised to learn that in his attempt to "fight deflation", the ECB's Mario Draghi unleashed the biggest deflationary wave of all time, when in the aftermath of the ECB's NIRP policy, and subsequently QE, an unprecedented €1.4 trillion in European debt with a maturity of more than 1 year traded down to subzero, as in negative, yields.

But what happens if one expands the Eurozone NIRP universe to include the debt of other countries including Japan, Denmark, Sweden, Switzerland and so on? Conveniently, JPM has done the analysis and finds that a mindblowing $3.6 trillion of government debt traded with a negative yield as recently as last week. This represents 16% of the JPM Global Government Bond Index, or in other words nearly a fifth of all global government debt is now trading with a negative yield, meaning investors pay sovereigns, using other people's money of course, for the privilege of buying their issuance!

JPM's full take:

There is currently €1.5tr or $1.7tr of Euro area government bonds of greater than one year maturity trading with negative nominal yields, almost all of them of core euro governments of up to 5 years maturity. This figure rises to $1.8tr if one adds $16bn of Swedish, $60bn of Swiss and $45bn of Danish government bonds currently trading with a negative yield. Almost all Japanese government bonds are trading with positive yields this week, but last week around $1.8tr of them were trading with a negative yield. So the total universe of government bonds traded with a negative yield was $3.6tr last week or 16% of the JPM Global Government Bond Index.

The logical follow up question: as the entire world appears slowly but surely headed to a uniform NIRP platform, where every single sovereign's debt will have a negative yield thanks to one or more central banks' guarantees that said debt will be monetized no matter what (those curious what happens when there is even a faint doubt if a given nation's Treasurys won't be backstopped and purchased by a central bank, just look at what happened to Greek bonds this past week), why do investors keep dumping their cash in securities that have a negative carry?

Here again courtesy of JPM's Nikolaos Panigirtzoglou, are six investor classes which, even with US stocks trading at the low, low forward GAAP PE of a modest 20x, prefer to incentivise governments around the globe to issue even "moar" debt, in the process making a global debt crisis that much worse, as the stock of government debt rises to truly catastrophic proportions.

  1. Investors who fear or expect deflation tend to find nominal bonds with even negative yields attractive as long as expected deflation makes real yields positive. In a deflationary environment investors tend to shift away from real into nominal assets. During the previous two decades in Japan, this took the form of a shift away from equities and real estate into cash and nominal JGBs.
  2. Investors who speculate on currency appreciation, for example investors buying Swiss or Danish government bonds to speculate on CHF or DKK currency appreciation.
  3. Investors who expect capital gains from central bank easing i.e. rate cuts or QE. For example, investors who have been buying euro area bonds over the past six  months in anticipation of ECB rate cuts and QE, have seen strong capital gains already and some of them hold on to their investments despite negative yields as they expect further capital gains. Another example is investors buying Swedish bonds currently to speculate on Riksbank cutting its repo rate to negative over the coming months.
  4. Central banks can buy bonds with negative yields. For example, the ECB stated that its QE program will encompass purchases of nominal bonds with negative yields. The ECB funds its bond purchases at a depo rate of -20bp so buying bonds with slightly negative yields is still a positive carry trade. The BoJ bought government debt securities at negative yields in recent months.
  5. Indexed or passive funds have to buy bonds with negative yields. This universe is considerable and has been growing due to an increasing shift towards passive investing. In the US the universe of bond and hybrid mutual funds that are passive is $375bn or 7.8% of all bond and hybrid mutual funds. Extrapolating this to the global bond and hybrid mutual fund universe of $11.5tr implies a passive bond and hybrid mutual fund universe of $900bn. And this excludes bond ETFs, a $350bn universe globally. Admittedly only a portion of these passive bond funds invest in government bonds only, but this portion is significant. In the case of bond ETFs for example we note that $150bn out of $350bn of bond ETFs invest in government bonds only.
  6. Banks buy bonds with negative yields to escape negative depo rates such as those by the ECB, SNB and the Danish central bank. There is currently a large amount of €220bn of reserves subjected to negative interest rates and this amount looks set to grow exponentially due to ECB's QE (this €220bn includes the ECB’s excess reserves, Danish central bank’s certificates of deposits and Swiss sight deposits subjected to a negative depo rate). And the recent experience in Switzerland shows that even a small amount of reserves subjected to negative interest rates can have a big impact on bond yields. For example, there are CHF380bn of sight deposits at the SNB’s balance sheet but only a small portion of around 10%-15% is subjected to the punitive -75bp depo rate. This is because this charge is only levied above a threshold which is 20 times the minimum reserve requirement. Most Swiss banks including the two biggest are said to be below this threshold. But foreign banks are more likely to be subjected to the negative depo rate. This is also true for financial institutions that do not have  inimum reserve requirements, such as insurance companies. These domestic financial institutions are subjected to a fixed threshold of only CHF10m, above which the negative depo rate will be applied. As of the end of December, foreign banks had CHF17bn of sight deposits with the SNB while non-bank domestic institutions had CHF33bn of deposits. At a depo rate of -75bp these CHF50bn of sight deposits could cost CHF375m per annum to their owners. This is enough for these institutions to rush to get rid of these deposits by purchasing bonds with yields as low as -75bp in order to reduce this loss. Most likely they purchase these bonds from banks not subjected to negative depo rate. As a result, 7-year Swiss government bond yields declined to as low as -67bp last week.

    In addition to negative depo rates, commercial banks still have a large gap between deposits and loans, meaning that they need to invest a large amount of excess deposits into securities. A big portion of this liquidity is invested in short-dated/intermediate government bonds of 2-5 year maturity given banks’ reluctance to take duration risk as it would compound the mismatch between asset and liabilities, given zero risk weighting for government bonds and given the liquidity coverage ratio regulation which forces commercial banks to buy high-quality government-related bonds.

Of note: in their infinite wisdom, regulators continue to keep government debt at a "zero risk weighting", which is perhaps the biggest self-fulifilling prophecy ever and one which is only valid as long as the weakest link in the "central banks are infallible" chain holds. Because a few more episodes like the SNB's shocking, and confidence-crushing, reversal in January, and the faith in central banker omnipotence will slowly but surely start to evaporate, and as it goes, it will also reveal just how much risk there truly is in this biggest "frontrun-the-central-banks" bandwagon trade of all time.

In the meantime, prepare for much more laughter as well as sheer horror, as such until recently Onionesque market dislocations as negative interest rate mortgages (now available in Denmark, soon everywhere else) become an ubiquitous feature of a broken financial system now clearly in its terminal phase, where prudent behavior is punished outright, while spending money one doesn't have, and will never be able to repay, becomes the most rewarded activity.

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Publicus's picture

There is no need for buyers. We simply print by the touch of a button.


It's just a game, with the digits stored in a computer file that we have full control over.


It's the game to crush the little people.

BlindMonkey's picture

People are clamoring for the safety of sovereign debt.

All sovereign debt is, by nature, unsecured.

So people are paying sovereigns for the privilege to own unsecured debt.

I am having a bout of combative dissonance that requires alcohol to manage.

Squid-puppets a-go-go's picture

these guys are SLOW man. still buying bonds at neg% when gold is starting to roar

NoDebt's picture

You can almost FEEL the end of the runway approaching.


kaiserhoff's picture

Good article.  Explains how many fools are locked into things that used to be sane,

But in terms of size, it is highly leveraged currency specuators buying this shit.  Who else?

End game approacheth.

turnoffthewater's picture

That's why you're blind, now pass the bottle

knukles's picture

"Why don't you knock it off with them negative waves? Why don't you dig how beautiful it is out here? Why don't you say something righteous and hopeful for a change?"

buzzsaw99's picture

Think that bridge will be there and it will be there. It's a mother, beautiful bridge and it's gonna be there. Okay?

Buckaroo Banzai's picture

Great movie but they never explained how a sixties hippie managed to travel in time back to WW2.

NoDebt's picture

Time travel, obviously.  You realize the government got that ability when they caputured the alien space shit at Roswell, right?

bluskyes's picture

The ECB is playing "chicken" with a cliff

Yen Cross's picture

 In America. That's what Europeans call it?

 The Land of MisAppropriation & Waste.

Carpenter1's picture

The environment makes it seem logical to pay someone to lose your money, but in 50 years people will just shake their head at how utterly stupid we must've been.

That, and to believe we could print prosperity forever, this generation may go down in history as the most delusional one ever.

nmewn's picture

"Of note: in their infinite wisdom, regulators continue to keep government debt at a "zero risk weighting"..."

Are you not entertained!?!? ;-)

Yen Cross's picture

Running Scared nmewn.

nmewn's picture

I think so but they have nowhere to hide.

Yen Cross's picture

 They have plenty of places to hide.  It took 50 years to track down war criminals.


BlindMonkey's picture

Unless you were in Unit 731 and traded you very carefully documented research to the Americans for amnesty. Some war criminals are more equal than others.

(FWIW: the unit 731 story was my "red pill" moment. I haven't been the same since)

Yen Cross's picture

I look forward to more links and information.

BlindMonkey's picture

Ooohh. There is a lot. The Wikipedia is a good place to start.


Yen Cross's picture

You're sourcing Wiki?

   Monkeys have Binocular vision.


BlindMonkey's picture

Yes. I am. It is usually a good place to start.

Burnbright's picture

I very much doubt any non-banking/central banker is buying negative yield sovereign debt. Who would honesty believe that even with deflation a negative yield somehow makes it all work out, its called cash if you want to keep from losing money with nirp and deflationary forces.

Yen Cross's picture

 What part of deflation have you missed?

 Smart guys that have expendable income, are buying the long end of the curve.


buzzsaw99's picture

yeah, the very, very long end. this will not be an easy mission. monkeys slow the expedition. [/jumanji]

Yen Cross's picture

 The primates keep buying the long end until the twig snaps.

 Who fills the void as the curve colapses? The Fed.?  Haaa FUCKING haaa

buzzsaw99's picture

what curve? lulz

Shut up Darlene. You're just jealous because I'm dating, and you're flat. [/Becky Conner]

Yen Cross's picture

   Buzz, looking at the curve. What curve?

  Mr. Yellen is hosed! What are the primary dealers going to do? The Fed. is quietly reducing inventory.

 The market is saying "go pound sand"!

Carpenter1's picture

We're not looking at a potential inverted yield curve, we're looking at a pretzel. The head analyst at my firm chuckles nervously when I tell him to prepare for the mother of all inverted curves.

He sees it coming too, but can't bring himself to admit it, because he knows we're staring down the shaft that leads to Hell.

km4's picture

RT @AP New Greek prime minister tempers earlier rhetoric and says Greece will pay debts, not act unilaterally: http://apne.ws/1CMHdvR 

A BIG fuck you to EU and IMF ( America )

Niall Of The Nine Hostages's picture

What did you expect he'd do? He values his life.

lordbyroniv's picture


SubjectivObject's picture

If melting during the destruction event can be substantiated, there must be micrographic/metallurgical evidence of such melting.  In situ or macroscopic sampling are not conclusive for melting during the destruction event.

mvsjcl's picture

Much evidence. Prof. Steven Jones.

hairball48's picture

Is there a line yet on whether or not Greece will have the seeds to tell the Eurocrats to piss off and default on Feb 28? Would that be the "pin" to prick this bond bubble?

disabledvet's picture

Well...if you're looking for yield Greece is a good place to start.

That is NOT a recommendation btw.

"Next up Spain" apparently.

The only quote you need to know is "we can't make money with natural gas at 37 cents." That's what they pull it out of the ground in Pennsylvania for.

We as Americans pay much for it than that...not nearly as much as the rest of the world does apparently.

Research "magnum hunter" if you want to see just how prolific the Marcellus Shale....that is actually the Utica shale...really is.

Darn right rigs are being shut down.

Not ALL the rigs however.

I look forward to XOM's earnings report on Monday.

buzzsaw99's picture

my credit cards are nirp too

mm account pays 0.13% a.p.r.. cc purchases pay 1.5% cash back monthly. i get paid moar to spend than to save these days. how sick is that?

Yen Cross's picture

I'm moving to the Netherlands Buzz.

buzzsaw99's picture

i thought about moving to the nether regions myself. ;)

Yen Cross's picture

 Just keep being real Buzz. ;-)  Honesty is a finite commodity.

CHX's picture

How much NIRPer can they go before the system implodes (e.g. bankruns on wide geographic scales) ?

AynRandFan's picture

This slide into less worthless paper assets proves the absence of desire for anything other than a liquid asset. Nobody wants to invest in productive assets like property, plants or equipment. There's no question but that Bernanke's central bank strategy was and is doomed by its inherent lack of credibility. Funny, really, that academic economists never imagined that phony money creation and phony debt purchases would fail to convince people that they were just as good as the real marketplace.

web2consumers's picture

Great infomation about goverment bonds

BS Econtalk's picture

Good list from JPM. Should have mentioned the main driver is the over-valued USD. 


Might have mentioned the other incentive for banks to hold negative yield bonds is Basle III rules too...


Still no convincing explanation for why SNB scrapped its peg either...