Negative yielding debt issuance slumps in 2022 as rates surge

Issuance of debt with yields below 0% has plummeted this year, in line with rising interest rates and a huge decline globally in the volume of negative-yielding securities.

A negative yielding bond essentially means the holder of the bond not only lends money but also pays the borrower to do so, rather than vice versa, if they hold the debt to maturity. The decline in such negative-yielding debt thus implies a rising cost of borrowing for many governments, which often are the safest debt issuers.

In syndicated debt sales, just $19.8 billion of debt carrying negative yields was issued in the first four months of 2022 through 28 bonds, down from $182.5 billion from 186 bonds during the same period last year, according to data from Dealogic.

A similar but slower decline in negative-yielding debt is seen at auctions where governments borrow most of the time.

Germany, the euro zone’s benchmark issuer, has auctioned 79 billion euros of negative-yielding debt, accounting for a still-hefty 72% of this year’s auction volume, according to Reuters calculations using data to April 20 from Germany’s debt office.

But that compares with 114 billion euros at this time last year, or 95% of the total. If yields stay positive, that ratio will fall further as it continues to issue bonds.

Germany earned around 5.855 billion euros ($6.22 billion) in 2021, and over 7 billion euros in 2020, owing to the negative yields on its debt, in other words being paid to borrow.

Spain, which for the first time achieved average negative borrowing costs in 2021, earned around 100 million euros, given an average cost of -0.04%.

The reduction in negative-yielding issuance follows a jump in interest rates this year as central banks battle inflation at multi-decade or even record highs.

Globally, the sub-zero yielding debt pool shrank below $3 trillion in late-March for the first time since 2015, having peaked at over $18 trillion in 2020, Deutsche Bank estimates.

The biggest driver was the European Central Bank, whose February decision to open the door to rate hikes this year halved the negative-yielding bond pool in just a week.

Germany’s 10-year bond yield, the benchmark for the euro area, is approaching 1%, having stood at -0.18% in January.

Money markets see the ECB hiking its -0.50% deposit rate by around 85 bps this year, ending a nearly eight-year period of sub-zero interest rates. IRPR

In anticipation of that move, all two-year euro zone debt yields are now positive, though shorter term bill yields mostly remain below 0%.

“Long-term investors will benefit from higher yields, and less negative yielding debt,” said Ryan O’Malley, portfolio manager at Sage Advisory Services. “In the long run, it doesn’t make sense to buy debt that has a negative yield, particularly in the face of higher inflation.”
Source: Reuters (Reporting By Patturaja Murugaboopathy and Yoruk Bahceli in Amsterdam; Additional Reporting by Gaurav Dogra in Bengaluru Editing by Vidya Ranganathan and Kim Coghill)