Fears Over A Bond Bubble Intensify As Negative Yielding Debt Nears $13trn

Almost $13trn of debt worldwide traded with sub-zero yields as at the end of June, according to the Bloomberg Barclays Global Aggregate Negative Yielding Debt index, surpassing the previous peak in 2016.

The figure has more than doubled since September.

Additionally, a bond market bubble was identified as the fourth biggest 'tail risk' in Bank of America Merrill Lynch's (BofAML) July Fund Manager Survey, with the number of professional investors fearing a bond bubble rising to 9% from zero in June.

Liontrust's Milburn: 'Bond prices are absolutely crazy'

Capital Economics also estimated that by the end of 2019 the 10-year bond yields in Germany, France, Netherlands, Austria, Finland, Sweden, Denmark and Switzerland will all be below zero.

Furthermore, credit strategists at Bank of America have said global bonds are the riskiest they have ever been with a duration of over seven years, meaning investors are taking on more interest rate risk.

Orbis's head of fixed income Ashley Lynn is one investment professional fearing a bubble, claiming not enough investors are worried. 

Lynn said the traditional 60% equity, 40% bond asset allocation model was largely to blame, adding those who still stick rigidly to this tend to continue to buy bonds no matter how low their expected potential return.

"It is a difficult situation where you have a large population of investors who think 60%/40% is moderate risk," said Lynn.

"The problem is government bonds are expensive, so they cannot give you the protection they did in the last financial crisis."

Monetary policy

While interest rates and subsequently bond yields have been at historic lows during the post-financial crisis quantitative easing (QE) era, recent monetary policy statements have sent yields negative.

St Louis Fed president: Rate cut may happen soon

The US Federal Reserve made a significant dovish pivot at the start of 2019. European Central Bank president Mario Draghi then paved the way for QEII, sending the benchmark 10-year German bund yield to a record low of -0.20%.

The nomination of perceived dove Christine Lagarde as Draghi's successor a fortnight later, according to Iain Stealey, international CIO of fixed income at J.P. Morgan Asset Management, was "almost the final act that has really driven yields lower" - the bund slipped further on the news to -0.40%.

Slowing global growth, trade wars and Brexit have, in turn, driven investors into safe-haven assets such as government bonds, added Lidia Treiber, director of research at WisdomTree, who expects the amount of negative yielding debt to increase.