Negative yield facts for the day

After a brief lull, negative interest rates are back in the news with a vengeance. This should make us sit up and wonder,

Bonds worth $15tn — roughly a quarter of the debt issued by governments and companies around the world — are currently trading with negative yields. That means prices are so high that investors are certain to get back less than they paid, via interest and principal, if they hold the bond to maturity. They are, in effect, paying someone to look after their money. 

In fact, yields on 10 year bonds of nine countries are now in the negative territory.

The spread of the negative yield phenomenon is a very good illustration of how interconnected and footloose global capital has become. What started out as a developed country phenomenon - low inflation and weak economic prospects - has driven capital into searching for yields thereby dragging down borrowing costs everywhere. In fact, yields on German bunds are trading below zero for upto 15 years.

It has created oddities everywhere,

Danish lender Jyske Bank last week issued a 10-year mortgage bond at an interest rate of minus 0.5 per cent, meaning homeowners are being paid to borrow. Meanwhile, Swiss bank UBS is planning to charge its super-rich clients for holding on to cash... Bonds issued by Poland, the Czech Republic and Hungary have joined the club.

Ananth points to the stunning inversion of logic from fact that Greek 5Y is 1.27% and US 5Y is 1.5%! Greece recently received orders of more than €13bn for the seven-year bonds, well above the €2.5bn on offer, at 1.9% below the 2.1% expected. Yields on even 10 year bonds of Greece breached the US level recently. As to the reasons, sample this,

The dramatic fall in Greece’s borrowing costs is a testament to how much it is now considered a stable member of the European Union, especially given that as recently as 2018, total Greek government debt was calculated at 181% of the country’s gross domestic product. It could also be a sign of desperate investors who are hungry for yield in a low-return world. Negative returns on core euro zone debt have pushed bond buyers to look at riskier sovereign debt from countries like Italy and Greece. Last Tuesday, Greece sold 2.5 billion euros of seven-year notes, attracting more than four times the bids needed to fulfil the sale.

Needless to say, the reason is most likely the latter. 

And underlining the lesson of traditionally very short investor memories and why this time is no different, Argentina, among the beneficiaries of the low-rate world, is bracing for its latest round of debt restructuring and/or default. The Peso tumbled by over 25% early this week and public debt has risen from 86% to 100% since 2018, 24 percentage points more than the 2019 IMF target as per the Fund's $56 bn restructuring program. Market participants expectations of a sovereign default over the next five years is put at a whopping 75%! The much hyped century bonds of the country is trading at a massive discount.

Clearly investors are betting on the very short-term when they are buying bonds at these yields. They are completely speculative search for yield bets. And the public resolve of governments and central banks to keep rates down only seems to anchor expectations among investors accordingly and keep inflating this bubble.

The only question is how much longer can the rates keep falling before investors and savers realise that the costs are simply unacceptable.

Update 1 (02.09.2019)

Thanks to the spectacular rise in central bank holdings and regulatory requirements, the volume of tradeable German bunds has shrunk, driving yields into the negative territory across all tenors. 

In fact, the volume of freely traceable Bunds are expected to drop below €70bn by 2024 down from more than €600bn a decade earlier.