The adoption of negative interest rate policy by the European Central Bank and Bank of Japan, among others, has had a dramatic impact on bond markets. The chart from Bank of America-Merrill Lynch (BAML) breaks down the share of the global fixed income debt that currently trades with a positive yield compared to those yielding below zero.
According to calculations from BAML’s European credit strategy team, 23% of bonds globally yield less than 0% at present, up substantially on 13% level seen the beginning of the year. Based on the chart, that equates to around $9 trillion in bonds that are currently trading with negative yields, a figure that could grow even larger should the current trend be maintained.
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By Michael D. Bauer and Glenn D. Rudebusch
“Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation.
Identifying the sources of this long-run decline in interest rates is of great interest to monetary policymakers, bond investors, and other financial market participants. But it is quite difficult to do. Standard statistical finance methods as employed, for example, in Wright (2011), suggest that the reduction largely reflected a decline in inflation uncertainty and that any decline in long-run expectations about inflation rates or real, that is, inflation-adjusted, interest rates played a small role. However, these methods suffer from statistical bias and can give misleading results. In recent research, we correct for this bias and reexamine the variation in long-term interest rates (Bauer, Rudebusch, and Wu 2013). ThisEconomic Letter summarizes our results, which differ from the standard ones by suggesting that falling long-run expectations of inflation and real yields were an important part of the secular decline in long-term yields.
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Why do we need the bond market and how big is it? If a business needs money the company can go to a bank and take out a loan. But there may come a time when the bank does not approve a loan or gives unfavorable terms, and the company does not want to attract shareholder equity (shareholder money) because it is more expensive than taking out a loan. In this case, the company may issue bonds. Large companies prefer issuing bonds than taking out loans as financing bonds is usually cheaper. In fact, bonds are a type of loan, taking money from investors now and promising to return the funds by a certain date, paying a certain interest for the use of the money. Read more »