Over the last nine months the outstanding amount of government bonds worldwide with negative yield has increased by $5.4trn to $11.7trn (using the latest daily estimate), homing in on the $12.2trn record set in June 2016. The majority is accounted for by Japan, Germany and France, which host three of the top five largest sovereign bond markets in the world. One of the most striking developments has been the rapid submergence of the bund curve, with over 50% of it now in negative yield territory (using interpolated 1 to 30-year benchmark yields) compared to just over 40% for JGBs.

There are three related conclusions that can be drawn from this observation. First, market expectations for growth and inflation have now become extremely pessimistic. Second, the market has likely become overextended given that fear-induced buying is saddling investors with negative returns. Third, European fixed-income markets are turning increasingly Japanese – characterised by low-to-negative returns and extremely low volatility. All of which suggests that the trajectory for prices has become asymmetric and will at some point leave bondholders reeling.

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Source: Bloomberg, Macrobond, Variant Perception