Unprecedented measures taken by central banks to fight deflation have seen negative interest become part of the "investment landscape" in recent years, according to a new report by QIC.

As of 30 June 2016, 42 per cent of government bonds by market value in the Citi World Government Bond Index were trading with a negative yield, the report said.

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According to ratings agency Fitch, the amount of sovereign debt trading with a "sub-zero yield" broke through US$10 trillion for the first time in May.

In theory, negative interest rates should incentivise both people and businesses to spend, said QIC – but, not for the first time, people are "behaving in ways that confound theorists".

"In Japan, consumers are hoarding cash – the opposite of what the Bank of Japan had hoped when it introduced negative interest rates. Signs are emerging of higher demand for safes – a place where the interest rate on cash is always zero, no matter what the central bank does," said the report.

And in Sweden – the closest country on the planet to a "cashless society", according to QIC – negative interest rates are beginning to be met with resistance.

"With a large part of the global bond market now exhibiting negative yields, investors need to respond by relaxing benchmarks, otherwise they stand the risk of having portfolios weighed down by loss-making assets," said the report.

"Intuitively, only positively yielding securities would be in a benchmark. After all, clients require positive returns, usually something ahead of the inflation rate.

"While tracking error (the deviation from benchmark) is a time-honoured way of keeping managers on the straight-and-narrow, the negative yield regime is not going away any time soon and adjustments must follow," said QIC.

"Rather than letting portfolios slowly erode by being chained to benchmarks increasingly disconnected from client needs, a head-on tackling of complications stemming from negative yields is required."

Negative yields are ultimately "corrosive" and fixed income portfolios must be adjusted before their full effects are felt, said the report.

"Investors need to get back to basics and question the risk/reward they want from fixed income. The past is not necessarily a good guide for what to do in today’s unusual environment," said QIC.

"In an effort to achieve higher potential returns, investors could give up some short term returns for prospectively better longer term gains."

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