Funds Face Trillion-Dollar Hit on Negative-Yielding

The slide of so many bond yields below zero may cost pension funds and other institutional investors a trillion dollars this year.

Investors could lose $864 billion on debt with negative yields over the next 12 months, according to Daniel Tenengauzer, head of markets strategy at Bank of New York Mellon Corp. He predicts bond holders could separately shed another $176 billion in lost purchasing power through the securities, which would guarantee a loss if held to maturity.

Around the world, traders must pay to lend on $13 trillion of debt as the coronavirus and heightened economic uncertainty help to underpin demand for the safest assets. Retirement funds are particularly exposed because they have few other secure places to store their assets, but need to generate returns to support pension holders into old age.

“Across the board people are living longer after 65 and spending more money on health care,” Tenengauzer said by phone. “On the other side you have a massive amount of assets in your portfolio that you need to pay to hold.”

Negative-yielding debt has shaken up the conventional wisdom that investors should be compensated for lending to governments or companies. Investors can still earn a return if bond prices keep rising, or by taking advantage of favorable currency dynamics that effectively inflate returns.

“It’s fine if there is growth but at the moment the global economy is not growing any more so portfolio managers may be stuck with an asset they can’t sell,” he said.

Pension assets reached $44.1 trillion worldwide at the end of 2018, according to the Organisation for Economic Co-operation and Development. Pension funds and all retirement vehicles across OECD member states held 45% of assets in bonds and bills, compared with about 55% in 2008.

Tenengauzer’s lost purchasing power calculations take into account 1% inflation and minus 0.26% yield, he said in a note. The market loss calculations assume the bonds normalize to compensate for inflation to yield about 1%, assuming a current 4.9-year average duration.

Greater Risk

The global stockpile of negative-yielding debt has dwindled since the peak of U.S.-China trade tensions in August 2019, when a third of all investment-grade bonds — $17 trillion — had rates below 0%. It touched a year-to-date high in late January amid tensions in the Middle East, before easing off.

The phenomenon effectively forces portfolio managers into riskier assets to deliver returns, which may be beyond their mandate and which could prove unsellable in future. The Dutch government in September criticized the European Central Bank’s latest wave of monetary easing amid fears about the fallout for its domestic pensions industry./

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