End may be in sight for sub-zero euro yields after ECB pivot

  • Global negative-yielding debt pile shrinks to lowest since 2015
  • All euro area five-year bond yields now positive
  • Swiss, Japanese five-year yields also turn positive

Feb 7 (Reuters) - The value of bonds carrying sub-zero yields globally almost halved last week and fell to the lowest in seven years after a hawkish pivot from the European Central Bank sent euro area bond yields surging.

The world's negative-yielding debt pool has been shrinking as central banks signal tighter policy, but since Thursday's ECB meeting the selloff has gained momentum in the euro zone, home to a significant chunk of sub-zero yielding debt.

ECB President Christine Lagarde's refusal to reiterate that a 2022 interest rate hike was very unlikely, lifted bond yields to multi-year highs. Later, Reuters also reported, citing sources, that the ECB could speed up the wind-down of its stimulus in March..

Five-year borrowing costs in Austria, Belgium, Finland, Portugal, Slovakia all moved into positive territory on Thursday and have pushed higher since.

With German and Dutch five-year yields climbing above 0% on Friday for the first time since 2018, all euro area bonds with maturities of five years and longer now carry positive yields.

Rohan Khanna, strategist at UBS called it a "significant milestone for every asset".

Until markets in Germany and Japan "feel liberated from the gravity of negative rates, we can't really have a proper selloff in global fixed income," he added.

Negative yields are vanishing elsewhere too - Swiss five-year yields rose above 0% on Friday for the first time since 2014 and Japan's for the first time since 2016. , .

And the European Union no longer has negative-yielding bonds left.

Globally, the value of negative-yielding debt stood at $4.9 trillion at the end of last week, according to the Bloomberg Global Aggregate Negative Yielding Debt Index, the lowest since 2015, when the ECB launched its asset-purchase programme.

That is down from $8.94 trillion just a week earlier, and from $9.84 trillion on Jan. 26. The pool had swelled to $17 trillion during the COVID crisis.

Negative yielding debt pool shrinks

For investors like pension funds and insurers, which need higher yields to match long-term liabilities, the end of sub-zero yields will be good news. But in the short-term markets may face more pain as surging yields mean bond prices are sliding.

"Ultimately, if we get a move higher in yields, it's good for fixed income markets but getting from A to B can be painful," said David Riley, chief investment strategist at BlueBay Asset Management.

It is also good news for the euro, which jumped 1.2% last week in its best weekly performance since March 2020, having long suffered against peers backed by central banks tightening policy faster than the ECB.

Markets bet and many investment banks now expect the ECB may deliver 50 bps of rate hikes this year, meaning its policy rate reaches 0% by year-end. read more

Even yields on shorter-dated bonds are already leaving the sub-zero club, with three-year Spanish and two-year Italian yields also turning positive.

"With the ECB's deposit rate rising to 0% next year, all euro debt should soon be out of that group," said Antoine Bouvet, senior rates strategist at ING.

German yield curve
Reporting by Yoruk Bahceli and Dhara Ranasinghe; additional reporting by Saikat Chatterjee; editing by Sujata Rao and Tomasz Janowski

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Thomson Reuters

Senior correspondent on the London markets team covering European sovereign bond markets and big macro and financial themes.