Central banks around the world have taken a huge slice of the mound of negative-yielding debt, talking about plans to raise interest rates and tighten financial conditions to combat high inflation in recent weeks.

According to a Deutsche Bank research note, the $18.5 trillion peak in negative-yielding global debt this week fell below $3 trillion, its lowest level since December 2015.

For government-issued bonds, the share has fallen to just under 8% of the total (see chart), after an “unbelievably crazy peak of around 40% in September 2019”, wrote strategy strategist Jim Reid. Deutsche Bank, in a client note on Friday. .

Less than $3 trillion of global bonds have negative yields, down from a high of nearly $19 trillion

Search Deutsche Bank

The share of negative-yielding debt issued by corporations fell to less than 0.1%, for the first time since hitting zero in 2020, as pandemic shutdowns took hold and credit spreads exploded.

“Before that, one would have to go back to February 2015 to find a smaller percentage of global corporate bonds with negative yield,” Reid wrote.

Investors who buy bonds with yields below zero are actually paying for the privilege of owning an investment, but the costs can be more than offset if the price of the security rises. Most bonds also pay a coupon, sometimes twice a year, providing investors with regular income.

Read: Negative-yielding bonds don’t mean negative-yielding bond funds (2019)

U.S. Treasury bond yields have risen sharply in 2022 as Federal Reserve officials have begun charting a more aggressive course of rate hikes. The 10-year Treasury rate TMUBMUSD10Y,
2.485%
was around 2.47% on Friday, on track for its biggest weekly gain since September 2019.

Treasury yields plunged early in the pandemic as the US central bank returned to accommodative monetary policies, although the bulk of global negative returns were in Europe.

If the European Central Bank were to raise rates twice this year, “as we expect, it is not impossible that by the end of the year the total amount of global negative yielding debt (including governments) is again negligible,” Reid wrote. “That will then end, for all intents and purposes, a strange 7-8 year experiment.”

Inflation rose in many countries following the pandemic, forcing central banks to raise interest rates, especially with US oil prices CL00,
+0.36%
above $113 and the overall BRN00,
-0.99%
benchmark crude above $120 a barrel on Friday, but policymakers also face the threat of slower economic growth as a result.

“The next hurdle,” according to Reid, would be getting global inflation under control so that “the percentage of global bonds that outperform inflation is miniscule.”

Read: Largest proportion of Americans since the 1940s say their financial health will deteriorate in the coming year