Risks for investors as well as developed economies are piling up with debt escalating during the coronavirus pandemic, a director at the Institute for International Finance (IIF) said on Friday.
The coronavirus crisis pushed global debt levels to a new high of over $272 trillion in the third quarter, the institute had said a day earlier. It said global debt would break new records in the coming months to reach $277trillion by the end of the year.
Governments globally have had to spend big on fiscal stimulus measures to support consumers and businesses as the pandemic battered economies.
Investors exposed to more risks as debt rises, negative yields take hold
Gibbs also flagged increasing dangers for investors who choose to invest in government bonds for the traditional stability.
China sold its first negative-yielding government bond this week, following the U.K. which also did so for the first time this year in May. That comes as rates went even lower during the pandemic. Government debt in Europe and Japan has long been offered with zero or negative yields, as central banks globally keep driving rates down.
“This is one of the biggest risks that comes with persistently high and growing debt. You’re seeing negative-yielding debt even in China. You have a situation where you’re just building up tremendous distortions,” Gibbs said.
A negative-yielding bond means the Chinese government is effectively being paid to borrow. Bond yields move inversely to prices. Those who buy negative-yielding bonds are essentially making a bet that rates will stay low and prices will rise. However, should rates start to rise even a little, that will start to eat into the capital appreciation that bond holders have been enjoying.
Gibbs flagged the risks to investors holding such debt.
“Investors who might want to stay in government bonds for the safety are driven into more and more risky categories of investments, simply because how can you achieve returns when your benchmark is of negative yields?” she warned.
″(It’s) been a problem in Europe for years, in Japan, and now you’re adding China to the mix. It really is a severe market distortion,” Gibbs said.
Reference: CNBC
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