Wow. A Record $11.7 Trillion Negative Yielding Sovereign Bonds Exacerbated by Brexit!

In barely a month, sovereign debt with negative yields has spiked by 12.5% from $10.4 trillion to $11.7 trillion! [updated: I revised growth figures to reflect  the numbers below]

Here is the updated report from Fitch: (bold mine)

Investors' flight to safe assets following the UK's EU referendum on June 23 pushed the global total of sovereign debt with negative yields to $11.7 trillion as of June 27, up $1.3 trillion from the end-May total, according to new analysis by Fitch Ratings. Brexit-related concerns drove more long-dated bond yields negative, with particularly big shifts in German, French and Japanese yield curves during June.

Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June. Widespread adoption of unconventional monetary policies, including large-scale bond-buying programs and negative deposit rates, have driven the large increases in negative-yielding debt seen this year…

The biggest drivers of the total increase during June were seen in longer-dated bonds. For example, German 10-year bund yields swung into negative territory and sub-zero yields moved further out on the curve for Japan -- now out to 17 years. Also, in Switzerland, virtually all sovereign debt carried a negative yield on June 27.

Japanese government bonds (JGBs) continue to represent about two-thirds of the global total ($7.9 trillion), while Germany and France each now have over $1 trillion in sovereign debt with sub-zero yields. Japan's negative-yielding debt total grew by about 18% during the month, while Germany and France's total grew by 8% and 13%, respectively. European negative-yielding debt increases were offset in part by an approximately $0.2 trillion reduction in the Italian total since May 31. This likely reflected investor risk aversion related to Italy leading up to and following the Brexit referendum.

The spread of negative yields into longer-dated paper was particularly evident in June. A total of $2.6 trillion in sovereign bonds with maturities of seven years or more now trade at a negative yield. This compares with the end-April total of $1.4 trillion.

The increasing amount of long-term negative-yielding debt underscores the challenges faced by large bond investors such as insurance companies that need to match long-term liabilities with similar maturity assets. As more of the global universe of safe assets drops into negative-yielding territory, income for these investors continues to fall.

Here is what I wrote last June 14:

This means that instead of borrowers paying lenders for the privileged to access someone else’s or the lender’s savings, negative yields means lenders are paying borrowers to borrow! Of course under the fractional reserve banking, lending is not a function of someone else's savings but from the central bank's digital press. 

Even more, any entity that owns a negative yielding instrument is guaranteed of losses. So the broadening of negative yields simply means that losses in the financial and economic system has been mounting! And all these for the sake of holding onto liquid instruments that ensures of the financing of spendthrift governments around the world. 

In short, negative yield is like a premium for the convenience yield. 

Think of what this will do to financial institutions, which are required to hold government debt as part of their Tier 1 Capital. 

And think of what this will do to pension and insurance funds. In order to match assets with liabilities these institutions are being forced out into the financial markets to gamble. And the yoke of the attendant risks from such speculative activities will be shouldered by depositors and pension beneficiaries…and eventually taxpayers and currency holders 

Notice that Brexit has only aggravated the spreading of negative yielding bonds yields.

The real reason for such dynamic has been Negative Real Rates Policy (NIRP). 

And notice too that bonds with a negative yield carry have been spreading faster than the growth in the government’s debt stock at $58 trillion as of 2Q 2014 based on McKinsey Global's estimates. This should be around close to $70 trillion today.

Uncharted here has been the concerted sharp flattening of the yield curves of developed economies in conjunction with negative yields.

Again, aside from mounting systemic losses and the increasing difficulties (growing imbalances) to match asset-liability gaps in balance sheets, the other outcome will be to deter credit activities which consequently should translate to further depletion of systemic liquidity. That’s aside from, to reiterate, losses being incurred by financial institutions. All these just to save the debt plagued governments.

The post-Brexit rally has hardly improved Japan’s Topix Banking Index, which has been drifting at a 3 year low

Stocks of Europe’s banks have currently been treading at 2008 crisis levels. A break below 2008 levels should ring alarm bells of a global banking crisis.

The world is complexly interconnected. 

While the US still operates on positive yield, exogenous developments from NIRP seem to have diffused into the US. 

Of course, internal dynamics from zero bound also plays a big factor.

So despite the furious two day rally in the equities, such has hardly diminish the reality that US bank stocks have been undergoing tremendous pressures!

And banking strains have been spreading too. This has been manifested in the Broker Dealer and Insurance indices

Add to these several more ominous writings on the wall: increasing incidences of global market crashes and magnified volatility (since 2013), the ongoing deepening anomalies in wholesale finance, the Chinese yuan's weakening, the US dollar strength, slowing global economy, swelling accounts of nationalism which may bring about heightened risks of protectionism and which subsequently means reduced social mobility and capital controls, intensifying geopolitical risks and more.

How much more pressures can the world absorb before the system becomes unglued?