The market cap of negative-yielding assets has grown in 2020, a continuation of the trend that started for real in 2016, as bond yields rallied around the world. 
Today, this number tops nearly $18trn, combing both government bonds and high-quality credit.
Whilst it may appear unusual, and certainly counter-intuitive to own a bond that guarantees a negative return over the life cycle of the asset, it’s a natural consequence of near-zero interest rates, and at times negative base rates.
Combined with massive quantitative easing (QE) programmes rolled out by central banks, it has become a simple equation of greater demand than supply, causing bonds to increase in value.
Negative debt pile to rise
Major markets have historically low yields. Take Germany where 10-year bund yields, one of the more extreme examples of negative yields in markets, are trading at minus 0.52 per cent. In Switzerland 10-year bonds are at minus 0.54 per cent. UK debt is negative-yielding up to five years currently, with only the US positive along the whole of the curve (commanding, as it does, a yield of 0.08 per cent on three-month paper). It’s entirely possible that the pile of negative-yielding debt grows further in 2021.
Given the magnitude of the hit to global growth, and the level of central bank support required to install confidence in the financial system, we do not expect interest rate rises, nor an easing in the levels of QE, for at least the next 12 months.
Other big buyers apart from central banks also exist. Pension funds, insurance companies, and mark to market investors (including UK ones) continue to own high-quality government bonds either as a regulatory must, or as an offset to other riskier assets that may be in their portfolios, or as an alternative to zero interest rate cash on deposits.
Within that context, the large-scale central bank bond buying, combined with the structural demand for any positive yielding assets, which is hard to come by in a world of zero interest rates, means that the stock of negative-yielding assets should grow once again this year.
What will burst the negative-yielding debt balloon?
Globally, from a macro view, the problems of 2020 are now the problems of 2021 and we don’t think a lot of them will get solved this year. To see a material reversal of the growth in negative-yielding assets, arguably you need some or all of the following to happen, which we believe are still some way off.
Firstly, sustained higher inflation expectations in the US and Europe. Second, a seamless economic recovery and an eradication of the ongoing risks to the economy and livelihoods posed by the pandemic.
Finally, rising official interest rates and a significant sell-off in government bonds to lead to what many investors would deem “normalised” levels, perhaps back to those seen prior to the negative yield environment with US 10-year Treasuries at 3 per cent.
One possible consequence of such a move might be another “taper tantrum” type environment where spreads widen and equities fall, in tandem with the shock of a bond market selling off and trying to find a clearing level.
In that environment, you might be better off in the relative safe haven of government bonds with their risk characteristics of having little or no credit risk.
Negative bond yields are counter-intuitive, but just maybe are a necessary evil of the complicated world of weak growth, low interest rates and low inflation expectations. Given the events of bond markets in 2008 to 2020, why shouldn’t we expect more of the unexpected in 2021?
Nick Hayes is a manager on the AXA Global Strategic Bond fund. The views expressed above are his own and should not be taken as investment advice.