Sunday, July 10, 2016

The march of negative rates continues

Sovereign bonds continue their slide down deeper into negative territory. Switzerland is at the forefront of the lurch towards negative rates. It has become the first country where even bonds out to 50 years have turned negative!
The Swiss 10 year bonds reached minus 0.616%. This follows news that the global sovereign bonds trading in the negative territory rose by $1.3 trillion to $11.7 trillion in June 2016.
And, foretelling more dismal economic prospects, the yields on Treasuries across major developed economies have been on continuous decline. The 10 year US Treasury bond fell to 1.385 per cent. In fact, this was a record low for the 10 year bond in a history spanning more than 225 years since 1790! The 30 year bond too touched its record low of 2.226 per cent.
Unfortunately, as the WSJ has described, large parts of the world economy may be gripped by a "doom loop". While these rates are eating into the banks' profitability and threatening their survival, a reversal could leave debt laden households, corporates, and sovereigns vulnerable!
There may be no satisfactory denouement for this. The idea of buying time with low rates so as to provide the space for deleveraging, the basis for the ultra-accommodatory monetary policies across developed economies, appears to have reached a dead-end. And we are not even talking other more deep-rooted structural features like secular stagnation. 

No comments: