Blame—or thank — central banks.
The pile of global debt now trading at yields below 0% has returned to record territory at about $17 trillion, after briefly dipping to nearly $10 trillion earlier this year, according to J.P. Morgan.
The culprit? The staggering $17.1 trillion collective balance sheets of four key central banks. The Federal Reserve, European Central Bank, Bank of Japan and the Bank of England’s asset portfolios have grown by $5.2 trillion over the past 12 months, mostly in a bid to offset the economic carnage caused by the COVID-19 pandemic.
Central banks have greatly expanded their asset holdings this year by ramping up purchases and by extending emergency funding programs intended to help keep credit flowing in financial markets during the crisis.
While those efforts have been viewed as widely successfully in terms of keeping borrowing costs low, the interventions also have pushed investors further into riskier assets that yield far less than in the past, critics say.
“That in turn led to a tremendous amount of negative yielding debt globally,” a team of J.P. Morgan credit analysts led by Eric Beinstein wrote in the bank’s annual credit outlook, a situation viewed as “putting further pressure on investors to find yield wherever possible.” Yields at less than 0% mean, essentially, that savers holding these bonds are paying the government to store their money.
For example, Germany’s 10-year government bond /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y +1.48% , known as bunds, was yielding negative 0.59% at the end of the week, compared with negative 0.19% at the end of 2019. Bond prices rise as yields fall.
And in recent trade, the U.S. 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.48% also has been receding, falling 3.6 basis point Friday to 0.842%, as Germany and France extended lockdowns to contain the pandemic, leaving the U.S. benchmark rate almost 1.1 percentage points lower in the year to date, according to FactSet data.
Meanwhile, U.S. stocks finished in record territory on Black Friday , with the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.39% and Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.97% ending at new all-time highs in an abbreviated holiday session, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.83% closed 0.1% higher, just under its 30,000 milestone set earlier in the week.
For fixed-income investors, the prospects of lackluster returns likely mean the biggest part of the $10.5 trillion U.S. investment-grade corporate bond market will be the “only game in town” next year for those looking for yields greater than 1.5%, the J.P. Morgan researchers wrote.
Here’s their chart tracking negative yielding debt globally since 2015, including as a percentage of the global aggregate.
The team also looked at rates on global investment-grade corporate debt, after factoring in hedging costs that “have fallen substantially in 2020,” as a result of the “uniformity of monetary policy globally.”
They found that $5.7 trillion, or about 90% of all U.S. investment-grade corporate debt, fits their yield target of greater than 1.5%.
U.S. corporations borrowed at a record pace in 2020 , bringing their debt loads near all-time highs even as earnings slumped, and while paying investors some of the skimpiest returns ever.
Despite the prospects of meager returns, Beinstein’s team at J.P. Morgan also note that corporate credit metrics are “weak and unlikely to improve significantly in 2021,” as companies try to maintain earnings growth while hoping for a light at the end of the tunnel of the unrelenting pandemic after several promising COVID-19 vaccine candidates emerged.
The corporate debt sector also will try to look past U.S. Treasury Secretary Steven Mnuchin’s decision to abruptly end several key emergency Fed lending programs , including two corporate credit facilities that have served as a backstop for the market.
“The Federal Reserve has utilized less than 10% of its credit programs, so they served more value from a ‘signaling’ perspective than from actual purchases,” said Scott Ruesterholz, portfolio manager at Insight Investment.
“As President-elect Joe Biden’s Treasury Secretary could reverse this decision in 2021 and reopen these facilities, the market has been able to look through this temporary disruption.” Biden plans to tap former Federal Reserve Chairwoman Janet Yellen as his nominee for Treasury secretary, the Wall Street Journal first reported.
J.P. Morgan’s team also expects a far less blistering pace of U.S. investment-grade corporate bond issuance in 2021, after an “outlier year in 2020,” as corporations amassed a trove of cash to help serve as a bridge during the crisis.
J.P. Morgan’s forecast is for net growth of only 6% for the U.S. investment-grade corporate bond market next year, or half of this year’s growth rate.
In other words, even if investors aren’t in love with the idea of earning yields a bit over 1.5% next year, they probably will still face healthy demand for newly issued corporate bonds.