The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, the highest in six months, as a relentless global bond rally drags borrowing costs below zero.

Government bond yields have tumbled in recent weeks as some traders have piled in, a move that has blindsided many investors who expected an economic rebound from the pandemic along with rising inflation to lift long-term borrowing costs.

While some of the biggest moves have come in the US Treasury market as traders unwind their bearish bets, bonds in Japan and the eurozone — the two main bastions of negative-yielding debt — have also benefited. 

Japan’s 10-year yield dipped below zero this week for the first time since December. In Europe, Germany’s 10-year yield fell to minus 0.51 per cent, the lowest level since early February. The country’s 30-year yield has also fallen beneath zero, meaning all of Germany’s debt, which serves as a reference for bonds across the euro area, now trades at negative yields.

Riskier borrowers in the currency bloc have followed in Germany’s wake, with France’s debt trading at sub-zero yields up to maturities of 12 years, Spain up to nine years, and Italy and Greece up to seven years. The global pile of negative-yielding debt has grown from just above $12tn in mid-May and is closing in on December’s record level of more than $18tn, according to an index compiled by Barclays.

Negative yields mean investors are willing to pay for the opportunity to lend their funds. Those who hold this debt to maturity are guaranteed to make a loss.

Although the shift partly reflects growing concerns that the Delta coronavirus variant could slow the recovery, many fund managers and analysts argue that rock-bottom yields, which typically signal a gloomy outlook, have moved out of step with economic reality. Instead, some point the finger at vast bond purchases by central banks, which they say have had an outsized effect during quiet summer trading conditions.

The European Central Bank raised the pace of its biggest debt-buying programme to €87bn in July, above the €80bn recorded in the previous three months. Those purchases had “steamrollered” yields on bonds across a broad range of maturities in the eurozone, according to ING strategist Antoine Bouvet. 

A dramatic drop in yields was “normally a pretty good sign that markets are predicting a dramatic slowdown in growth or even a recession”, he said. “Don’t be fooled. I’m not discounting 100 per cent of the economic worries, but by and large the reason interest rates have dropped so much is because of central bank interventions.”

Traders say activity has dwindled in recent weeks, meaning markets have moved based on relatively few transactions. In Japan, typically the sleepiest of the world’s major government bond markets, there was no trading activity in the 10-year benchmark bond on Tuesday.

Many fund managers who continue to expect a rebound in yields have decided to ride out the summer lull before renewing their bearish positions. 

“Investors are saving their bullets because they have been badly burnt in the last quarter,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée, who has exited bets against German bonds over the past few weeks. “We need to wait for new triggers for markets to sell off again, and we aren’t looking to get in the way of this move over the August period.”