Pandemic fueled debt and negative-yields create risks for investors

A man wears a protective mask while running behind The People’s Bank of China in Beijing.

Emmanuel Wong | Getty Images

SINGAPORE – Risks to investors as well as developed economies are accumulating with debt rising during the coronovirus epidemic, a director of the Institute for International Finance (IIF) said on Friday.

The coronovirus crisis pushed global debt levels to a new high of more than $ 272 trillion in the third quarter, the institute said a day earlier. It said that global debt would reach $ 277 trillion by the end of the year in the coming months.

Governments globally have had to spend big on fiscal stimulus measures to support consumers and businesses as epidemic economies.

Sonja Gibbs, IIF managing director of global policy initiatives, told CNBC on Friday that a major area of ​​concern is in developed markets, which are struggling with slow growth and rising debt at the same time.

“In mature markets, debt continues to rise. No government is forming while the sun shines. In other words, when growth has strengthened, governments have not cut their debt levels. So they are higher and higher. “He told CNBC’s” Street Signs Asia. “

During the epidemic, governments in these developed markets have been experiencing a double whammy, according to Gibbs, experiencing additional growth percentage, racking up debt – an extra 50 percent.

Gibbs said: “In the long run, there is a kind of risk from mature markets – weak growth, to keep rates low indefinitely. This is a big problem.”

As loans grow, investors face more risk, yields are negative.

Gibbs also marked growing threats for investors who choose to invest in government bonds for traditional stability.

This week China sold its first lending government bond after Britain, which did so for the first time in May this year. This is when rates drop even further during the epidemic. Government debt has long been offered zero or negative yields in Europe and Japan, as central banks globally keep driving rates low.

Gibbs said, “This is one of the biggest risks that comes with consistently high and rising debt. You are also looking at debt-yield debt in China. You have a situation where you just create tremendous distortions. are doing.”

A negative yield bond means that the Chinese government is effectively being paid to borrow. Bond yields run contrary to prices. Those who buy bonds with negative yields essentially place a condition that rates will remain low and prices will rise. However, the rates should start to rise slightly, which will begin to eat into the appreciation of capital that bond holders are liking.

Gibbs flagged the risk for investors holding such loans.

“Investors who want to stay in government bonds for protection can be driven into riskier categories of greater investment, just because you can get returns when your benchmark is of negative yields?” He warned.

Gibbs said, “This) has been a problem for years in Europe, in Japan, and now you’re adding China to the mix. It’s a really serious market distortion.”

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