The $10 Trillion Pool of Negative Debt Is a Late-Cycle Reckoning

(Bloomberg) -- The stockpile of global bonds with below-zero yields just hit $10 trillion -- intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown.

A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017 as 10-year bunds trade in negative territory and the U.S. yield curve flashes recession warnings.

With central banks in dovish mode, money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing, according to Gary Kirk, a founding partner at London-based TwentyFour Asset Management with $19 billion overall.

“This obviously tempts those investors holding cash to move along the maturity curve -- or down the rating curve -- to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Kirk is “resisting the temptation” to snap up longer-dated credit obligations that could succumb to defaults in a downturn and prefers duration bets in interest-rate markets.

Fight for Yield

Fund flows underscore the lust for yield in the low-rate, lowflation climate. Investors in the week through March 20 parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to a Bank of America Corp. note citing EPFR data.

“The extraordinary abrupt end to central bank hiking cycle + Fed paranoia of credit event is uber-bullish credit & uber-bearish volatility,” strategists including Michael Hartnett wrote.

While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

“We’ve never seen monetary easing so long, so broad, so big,” said Brian Singer, head of dynamic allocation strategies at William Blair, a Chicago-based fund manager that oversees $70 billion overall. “What’s happened after every significant period of accommodation is a reckoning. This time the bubble is lower-rated credit and illiquid private assets.”

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

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