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News & Views

Provided by the Investment Professionals of Frost Investment Advisors | April 04 , 2022

Negative Debt Down, Recession Not Imminent

Negative-Yielding Debt Drops Dramatically in Q1

Over the past ten years, the idea of selling a bond with a negative yield went from preposterous to reality. Some of the largest economies took advantage of their local investors’ desire for financial security, issuing huge amounts of sovereign debt at negative yields. The total outstanding negative-yielding debt rose to a peak of $18 trillion at the end of 2020. It fell to a still significant level of $14 trillion at the end of 2021, but has fallen off a cliff since, dropping to about $3 trillion as of this writing. While good news for fixed income buyers because now they receive income instead of paying for the privilege of owning a bond, it is terrible news for the central bank issuers, now paying to borrow. Increased debt service means that next year’s spending will cost more, as will existing debt that must be rolled over into new borrowing. Japan and Germany have seen the biggest shift in rates so far, but rising yields are beginning to affect countries around the globe, with the largest impact being felt by the emerging markets. While monetary authorities have responded to rising inflation by tightening financial conditions, governments have continued their expansionary fiscal spending.

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