As the world’s most important central bank, the US Federal Reserve, steadily hikes interest rates, some $9 trillion of global government debt still trades at negative rates. That is, these bonds pay back lenders less than face value if they hold the debt to maturity. The amount of negative-yielding debt has grown by around $900 billion over the past few months, according to Fitch Ratings.
Typically, negative rates are a reflection of market anxiety, reflecting central bank stimulus—key rates in the euro zone and Japan currently sit at 0% or below in hopes of reviving moribund economies—and investors flocking to the safety of bonds. (Bond prices move inversely to yields, so the greater the demand, the lower the rates.)
The jump in negative-yield bonds may seem unusual, given positive signs for economic growth in many parts of the world. The IMF expects the global economy to expand by 3.5% this year, up from 3.1% in 2016. The US central bank is expected to raise its benchmark interest rate later today, which would be the second hike this year. In part, the recent rise in negative-yielding debt is down to exchange rates, with the euro and the yen—which account for a lot of negative-rate bonds—rallying against the dollar.
The sheer amount of negative-yielding government debt, however, shows just how far we are from anything resembling “normal” market conditions. While the US is slowly raising borrowing costs, the Fed’s $4.5 trillion balance sheet is still stocked up on government bonds it bought as part of emergency stimulus programs. This continues to keep interest rates on everything from mortgages to car loans contained. Likewise, in Europe, the European Central Bank owns more than $4 trillion in assets, and even as economies in the euro zone show signs of improvement the bank isn’t sure when it will stop pumping money into the system to prop it up by keeping rates low.