As we noted a few months ago, ever since the ECB launched its sovereign debt QE, initially known as PSPP, in March 2015 and later expanded to include corporate debt, or CSPP, in June 2016, the world's biggest hedge fund central bank has created enough money out of thin air to purchase bonds with no consideration for price to grow its balance sheet, i.e. investment portfolio, by nearly €2 trillion.
Not surprisingly, that massive buying spree triggered a multi-year plunge in sovereign yields. But, with the Fed now raising rates on expectations of higher inflation and promises from the ECB to cut their QE targets in half for 2018 to a measely €30 billion a month "from January 2018 until the end of September 2018," you might expect global yields to be slowly normalizing as well...but you would be wrong.
As Fitch noted recently, despite moves by the Fed and ECB to "normalize" their various stimulus programs, the amount of negative-yielding debt around the world has actually increased YoY from $9.3 trillion last year to $9.7 trillion today.
The total amount of global negative-yielding sovereign debt remains at elevated levels despite the European Central Bank's (ECB) plan to reduce monthly asset purchases amid improving economic fundamentals in the Eurozone, according to Fitch Ratings. As of Dec. 4, 2017, there was $9.7 trillion of negative-yielding sovereign debt outstanding, up from $9.5 trillion on May 31, 2017 and $9.3 trillion one year ago.
Eurozone GDP growth in 2017 has exceeded Fitch's initial expectations and momentum is expected to continue into 2018. Improving growth has led the ECB to plan to slow the pace of asset purchases to EUR30 billion per month beginning in January 2018. Fitch currently forecasts 2.3% and 2.2% GDP growth in 2017 and 2018, respectively. However, these changes have not led to materially higher yields on government debt for short or long-term maturities in the Eurozone.
Of course, the negative yields might have something to do with the fact that even at a prevailing purchase rate of just $30 billion per month the ECB is still on track to purchase some 2.25x more bonds in 2018 than the expected new issuance volume.
Then again, maybe asset managers have simply decided that the sovereign debt market is the most attractive bubble when compared to the risks associated with all the other bubbles around the world.