Negative Yields: The Final Frontier–Or A Brave New World?

Investors just can’t get enough of low (and falling) yields. There’s a “nearly insatiable global demand for yield,” observes Aaron Kohli, interest-rate strategist at BMO Capital Markets. Where this ends and what it portends is unknown. Meantime, yields continue to tick lower, dipping below zero in some corners. Let’s call it the Star-Trek factor. As the crowd chases bonds with record low payouts, the fixed-income crew is exploring strange new worlds, boldly venturing to go where no investor has gone before.

Consider the sub-zero realm in Germany, which earned the dubious distinction yesterday as the first country in the euro area to auction government bonds with negative yields. The news is hardly a shock, given that existing bonds have recently been trading at negative yields lately. Germany’s 10-year, for instance, has been slightly negative in recent weeks. But with the government auctioning new bonds with minus signs preceding the stated coupon payout, the new world order has reached a new official low.

The dip into negative territory for the German 10-year is all the more striking since the country’s bonds are considered among the safest assets in the world, perhaps second only to US Treasuries. But safety has a price, and one that’s slowly but persistently cutting deeper. Indeed, buying a new 10-year bond for what is effectively the Eurozone benchmark rate is guaranteed to lose money if the security is held to maturity. Safety has a new definition in the 21st century.

“It’s a new reality and I think it will be like this for quite a while,” says Philippe Gijsels, chief investment officer at BNP Paribas Fortis in Brussels.

Lest you think the dive below zero is limited to Germany, think again. Fitch Ratings late last month advised that the global total for sovereign debt with negative yields jumped to $11.7 trillion at the end of June—up $1.3 trillion from the previous month. “Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June,” Fitch explained. “Widespread adoption of unconventional monetary policies, including large-scale bond-buying programs and negative deposit rates, have driven the large increases in negative-yielding debt seen this year.” At the forefront of last month’s dip: “particularly big shifts in German, French and Japanese yield curves during June.”