Who Is Buying Bonds With Negative Yields? JPMorgan Answers

This is a longish way of saying that when factoring for FX hedging, the fact that the US has positive nominal yields means little when they net to even lower yields when FX hedged vs Europe or Japan.

Meanwhile, CTAs and other momentum-based investors are price-based (i.e., they care for capital appreciation) rather than yield-based investors, and as shown in Figure 9 above, this momentum has strengthened since 10y Bund yields turned negative in early May suggesting these investors have been buyers of negatively yielding bonds until more recently. Indeed, the z-score for 10y Bunds has doubled since early May, suggesting the size of positions may also have doubled.

Finally, some insurance companies constrained by solvency ratios may be forced to de-risk and buy negatively yielding bonds, even though that assures capital loss through maturity; one loophole - hope that a greater fool emerges (i.e., central bank QE) allowing the insurance company to sell the bond at a capital gain to a third party. Similarly, pension fund with wider funding gaps may be forced by regulators to reduce duration mismatches even as yields turn negative.

Putting the above together, it suggests that in terms of the flow into negatively yielding bonds, foreign investors have been the most substantial influence, and that CTAs and other momentum-based investors have also been an influential flow, but that insurance companies have likely been a more modest influence.

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