Already-falling debt yields have taken a further plunge as sales of negative-yield bonds rise amid crisis in Europe.
Germany became the first eurozone country to issue negative debt after selling 10-year bunds at -0.05 per cent in July. This was only the second occasion a G7 nation had been forced to take this action; the Japanese government issued sub-zero yield bonds in March.
“Negative yields on government bonds have become more widespread over the past couple of years,” said Mitul Patel, head of interest rates at Henderson.
“Investors have bought negative-yielding government bonds in an attempt to avoid paying a greater negative-interest rate on deposits and have speculated on whether interest rates could be cut even further in Europe and Japan, leading to further declines in government bond yields.”
Mr Patel added central banks have bought large amounts of government bonds through quantitative easing, which has increased bond demands and subsequently driven negative yields.
On the same day as Germany, the Swiss government sold debt maturing in 2058 with a -0.023 per cent yield.
UK government bonds are currently positive but, according to Mr Patel, some traded with negative yields shortly after the referendum result. Expectations are looming that the Bank of England could cut rates in August, but only drastic cuts would cause negative debt to soar.
Mr Patel added, “For negative yields to become more widespread across the maturity spectrum, the BoE will need to take rates into negative territory.”
