An unusual world where bonds trade with negative yields
There has been a long run decline in bond yields since their peak in 1980s in industrialised nations but few economists have foreseen the day that government bond yields would actually turn negative. However, following the financial crisis bond yields started to fall dramatically especially for sovereign debt which was fuelled by a flight to safety. The move to negative yields in some countries started with 2 year to maturity bonds, then spread to 5 year bonds and in some countries it later spread to 10 year to maturity bonds. By the end of June 2016 it was estimated that globally over $11.7 trillion of bonds had negative yields. Much of this debt was Japanese government debt accounting for some $7.9 trillion of the total.
Government Bond Yield as at 28 July 2016
2 Year 5 year 10 year
Austria -0.521 -0.415 0.108
Denmark -0.438 -0.294 0.106
France -0.551 -0.385 0.141
German -0.616 -0.511 -0.076
Japan -0.366 -0.376 -0.294
Netherlands -0.587 -0.438 0.036
Sweden -0.662 -0.482 0.179
Switzerland -0.903 -0.899 -0.543
UK 0.124 0.299 0.741
US 0.727 1.101 1.516
The reasons why bond yields have turned negative are many and varied, part of the reasons has been a “flight to safety” following the financial crash of 2007-2009 many investors have been afraid to invest in risky assets and buy Treasury bonds which are perceived as safe, another important reason has been unprecedented and massive Quantitative Easing (QE) policies by central banks in which the programmes involve central bank purchases on government bonds, these policies have been undertaken by the Federal Reserve, the Bank of England, the European Central Bank and Bank of Japan by pushing up bond prices the QE programmes have tended to lower bond yields.
The QE policies mean that central banks hold in excess of $11 trillion of government debt by mid 2016. Another reason has been what economist refer to as a “savings glut” there has been too much saving and not enough expenditure in the global economy and much of the savings has ended up in “safe” government bonds. Also increased regulation of the banking system which involves them raising their capital and liquidity requirements has meant more of the money is held in government bonds further depressing bond yields. Another factor has been the large fall in inflation rates and even negative inflation in countries combined with a perceived slowing of future growth of the global economy which depresses bond yields. Other commentators believe that we have entered a “bond bubble”, with bond prices rising as yields fall then investors have for a long time been rewarded by purchasing bonds which further depresses their yields, this leads to further bond price rises and even more negative yields.
The rise in negative yielding government bonds is clearly not without dangers the more negative yields become and the greater the potential for large losses if bond yields were to suddenly rise. There are also adverse effects for capital allocation and savers if government bond yields are artificially low. I would steer clear of any 5 and 10 year bonds with negative yields.
There has been a long run decline in bond yields since their peak in 1980s in industrialised nations but few economists have foreseen the day that government bond yields would actually turn negative. However, following the financial crisis bond yields started to fall dramatically especially for sovereign debt which was fuelled by a flight to safety. The move to negative yields in some countries started with 2 year to maturity bonds, then spread to 5 year bonds and in some countries it later spread to 10 year to maturity bonds. By the end of June 2016 it was estimated that globally over $11.7 trillion of bonds had negative yields. Much of this debt was Japanese government debt accounting for some $7.9 trillion of the total.
Government Bond Yield as at 28 July 2016
2 Year 5 year 10 year
Austria -0.521 -0.415 0.108
Denmark -0.438 -0.294 0.106
France -0.551 -0.385 0.141
German -0.616 -0.511 -0.076
Japan -0.366 -0.376 -0.294
Netherlands -0.587 -0.438 0.036
Sweden -0.662 -0.482 0.179
Switzerland -0.903 -0.899 -0.543
UK 0.124 0.299 0.741
US 0.727 1.101 1.516
The reasons why bond yields have turned negative are many and varied, part of the reasons has been a “flight to safety” following the financial crash of 2007-2009 many investors have been afraid to invest in risky assets and buy Treasury bonds which are perceived as safe, another important reason has been unprecedented and massive Quantitative Easing (QE) policies by central banks in which the programmes involve central bank purchases on government bonds, these policies have been undertaken by the Federal Reserve, the Bank of England, the European Central Bank and Bank of Japan by pushing up bond prices the QE programmes have tended to lower bond yields.
The QE policies mean that central banks hold in excess of $11 trillion of government debt by mid 2016. Another reason has been what economist refer to as a “savings glut” there has been too much saving and not enough expenditure in the global economy and much of the savings has ended up in “safe” government bonds. Also increased regulation of the banking system which involves them raising their capital and liquidity requirements has meant more of the money is held in government bonds further depressing bond yields. Another factor has been the large fall in inflation rates and even negative inflation in countries combined with a perceived slowing of future growth of the global economy which depresses bond yields. Other commentators believe that we have entered a “bond bubble”, with bond prices rising as yields fall then investors have for a long time been rewarded by purchasing bonds which further depresses their yields, this leads to further bond price rises and even more negative yields.
The rise in negative yielding government bonds is clearly not without dangers the more negative yields become and the greater the potential for large losses if bond yields were to suddenly rise. There are also adverse effects for capital allocation and savers if government bond yields are artificially low. I would steer clear of any 5 and 10 year bonds with negative yields.
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