Fitch: $9.7T of Neg Yielding Debt Despite Monetary Normalization
(The following statement was released by the rating agency) NEW YORK, December 11 (Fitch) The total amount of global negative-yielding sovereign debt remains at elevated levels despite the European Central Bank's (ECB) plan to reduce monthly asset purchases amid improving economic fundamentals in the Eurozone, according to Fitch Ratings. As of Dec. 4, 2017, there was $9.7 trillion of negative-yielding sovereign debt outstanding, up from $9.5 trillion on May 31, 2017 and $9.3 trillion one year ago. Eurozone GDP growth in 2017 has exceeded Fitch's initial expectations and momentum is expected to continue into 2018. Improving growth has led the ECB to plan to slow the pace of asset purchases to EUR30 billion per month beginning in January 2018. Fitch currently forecasts 2.3% and 2.2% GDP growth in 2017 and 2018, respectively. However, these changes have not led to materially higher yields on government debt for short or long-term maturities in the Eurozone. Total negative yielding debt in Europe has risen compared to about one year ago and six months ago (see above chart). Much of this increase is attributable to the appreciation of the Euro relative to the US dollar, as Fitch states all debt in US dollar terms. Current yields in Japan and Europe are generally flat, or marginally lower in aggregate, compared to Nov. 28, 2016 and May 31, 2017. Ongoing easing by the ECB is likely having effects on global financial markets. ECB net purchases of public-sector debt securities have been roughly 3.5x the volume of net issuance on average in 2016 and 2017, forcing holders of Eurozone debt to purchase other assets, such as US treasury securities. While long-term yields in the US remain low, they remain well above core Eurozone yields that are near their 2017 lows. The spread between US and German 10-year government bond yields was just over 200bps on December 4. The current low yield environment globally presents continued challenges for buy and hold fixed-income investors with significant allocations to medium and longer-term sovereign debt. Maturing securities will continue to be reinvested in securities with little to no coupon income in Europe and Japan, hurting investment income and increasing duration risk, all else equal. In Germany, a bond originally with 10 years to maturity will come due in January 2018 with a coupon of 4%. If reissued, with a coupon at current market rates, the German bond will have a coupon of around 30bps. Additionally, a flattening yield curve in the US presents difficulties for institutions dependent on maturity transformation, such as banks. Foreign investment has likely contributed to a rapidly flattening yield curve in the US. The Federal Reserve (the Fed) continues to raise the Fed Funds rate slowly, with another increase expected on December 13. The Fed recently began unwinding its $4.4 trillion balance sheet. Demand from yield-hungry investors overseas has applied downward pressure on US yields, keeping the 10-year treasury in a mostly flat trading range in recent months. Meanwhile, yields on shorter-term securities have risen rapidly, bringing the spread between benchmark 2-year and 10-year US treasury securities to 57bps on December 4, the tightest since before the financial crisis. This is despite the fact that US GDP growth has exhibited strong momentum and outperformance in 2017, similar to the Eurozone. All figures stated in this Fitch Wire are as of Dec. 4, 2017 at close of market. For details on Fitch's methodology, please see Fitch's special report: Negative-Yielding Sovereign Debt (Global Total Falls Back to $10.9 Trillion in September) (September 2016). Contact: Jonathan Boise Associate Director, Macro Credit Research + 1 212 908-0622 Fitch Ratings 33 Whitehall Street New York, NY 10004 Brian Coulton Managing Director, Fitch Economics +44 203 530-1140 Fitch Ratings, Ltd 30 North Colonnade, Canary Wharf London E14 5GN Robert Rowan Senior Analyst, Fitch Wire +1 212 908-9159 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.