In 2016, in the wake of the UK's Brexit vote, government bond yields around the globe spiked lower.
At the nadir, around $13trn of debt offered negative yields.
I thought that was the top of the bond bubble (bond prices rise when yields fall, and so prices peaked when yields troughed).
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Turns out I was wrong. By the end of last week, we were back in the same situation more than $13trn of debt (including some corporate debt) around the world boasted negative yields.
What's going on? And what does it mean for investors?
Why are so many governments able to charge their lenders interest?
Why is so much of the world's government debt trading in negative territory?
In "normal" times, if someone borrows £100 from you, you would expect them to offer you an interest payment. You lend out £100, and you might want to get £105 in a year's time.
A negative yield means that you are lending someone £100, in the expectation that you will get £99 or less back in a year's time. In other words, the person who is borrowing the money is charging you interest, rather than the other way around.
Why would you ever accept that deal? Well, let's have a look at what's going on and see if we can unpick it.
First, let's consider where this is happening. If you look at the figures, then you have negative-yielding debt in Switzerland, throughout the eurozone, and in Japan. The Swiss government can charge investors to lend to it over any period up to 15 years. Same for Germany. And Japanese yields are negative out to ten years.
Second, let's look at where it's not happening yet. The UK will stay pay you interest on gilts (UK-issued government bonds). And the US is still paying interest too on its US Treasuries.
So this is clearly not an issue with the relative riskiness of the countries in question. You might be inclined to moan about various aspects of politics in the UK and the US, but no one can say that Italy is a better credit risk than either of those countries.
So what is it all about?
The common threads loose monetary policy and fear of recession
Let's look at what else those negative-yielding countries have in common.
Long story short, all of the central banks involved are still running extremely loose monetary policy of one sort or another, and are promising to do even more.
The Swiss central bank is holding interest rates at negative 0.75%, and keeps printing money to prevent the Swiss franc from getting too strong.
The European Central Bank (ECB) is maintaining its balance sheet (in other words, when bonds mature, the ECB replaces them). On top of that, the ECB has hinted at restarting stimulus if needs be.
As for Japan the Japanese central bank's balance sheet is already larger than the nation's GDP. In other words, the value of assets owned by the central bank are larger than the value of a year's economic output. That's a big balance sheet.
By contrast, America's central bank, the Federal Reserve, has been shrinking its balance sheet. It's about to stop doing that, and about to cut interest rates, but it's still a much more aggressive monetary policy than that of any other major central bank.
As for the UK, the Bank of England has largely been held back from raising interest rates by the ongoing Brexit saga. It's hardly a "hawkish" story but it's still less dovish than most other central banks. (Also, the BoE has largely been able to duck out of the "currency wars", because our politicians have provided the perfect excuse for a weaker pound.)
In other words, the looser the central bank's policy, the more negative the government bond yields. That makes sense.
For one thing, you have a big, price-insensitive buyer competing with forced buyers (institutions who either have to hold this stuff for regulatory reasons, or because it's their equivalent of cash) in a limited pool of assets.
For another, you have a momentum trade going on. Bonds might look expensive, but if the ECB says it's going to buy more, then why wouldn't you jump in there ahead of time? It's a form of legal front-running after all. Why not take advantage?
And as Bank of America Merrill Lynch points out, bonds have done extraordinarily well over the last 12 months sovereign debt has beaten stockmarkets in pretty much every country. It's tempting to stick with that.
Finally, there is a "fear trade" going on. Another survey from BoAML revealed that fund managers were feeling more gloomy in June than at any point since the global financial crisis.
Expect a bounce in bond yields because this is daft
Putting it bluntly, none of this makes a lot of sense. Recession might be coming, but it's unlikely to be a 2008-scale deflationary collapse. This aspect of the fear trade is pure muscle memory investors are still fighting that last war, as usual.
As I've said more than a few times, the denouement for the next crisis is far more likely to be inflationary than deflationary. Trade wars are inflationary. Printing money is eventually inflationary, particularly if we embark on MMT (modern monetary theory) inspired handouts.
Ongoing financial repression is quite possible the institutions who are forced to hold government bonds may be forced to hold even more. So it's certainly true that bond yields can be held where they are by force. But that would merely make them even worse investments in a world beset by rising inflation.
Given the levels of bearishness and the turn to rate cuts highlighted by the Fed, I'd be surprised if we don't see bond yields bounce shortly (and thus bond prices fall). But even if they don't, I'm not a buyer.
For more on the impact of trade wars on currency markets, download our report on The Future of Global Trade (in association with currency specialists OFX) it's a good in-depth read on the history of trade and how things might develop in the near future. It's totally free of charge just fill in your details here.
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