Forget high-yield bonds. The real froth in markets can be found in the swelling pool of negative-yielding government debt from Europe to Japan.
That’s according to Mark Kiesel, chief investment officer for global credit at Pacific Investment Management Co., who’s increasingly wary of investors paying governments from Spain to Switzerland to lend to them.
“The bubble is really in some of these yields, these negative yields,” Kiesel said in a Bloomberg Television interview Friday. “I don’t think they’re sustainable.”
While the concept of negative-yielding bonds has become pretty mainstream this year against the backdrop of aggressive stimulus from central banks globally, it’s unusual from an historical perspective. Since September last year, the pool of European bonds that essentially charge investors to own them has almost tripled to 2.8 trillion euros ($3 trillion) from 1 trillion euros, according to Bank of America Corp. data.
That pool of negative-yielding debt is almost twice as big as the outstanding investment-grade corporate debt in Europe, and almost nine times as large as the European high-yield bond market, according to Bank of America.
Policy makers from Europe to Japan are trying to ignite inflation by spurring investors to buy riskier debt to avoid losses on money deposited in banks or safer government securities. If they’re successful in their efforts, they’ll eventually back away from their easy-money policies, allowing yields to rise and bonds to lose value.
“Monetary policy around the world, their mission is to reflate,” said Kiesel of the Newport Beach, California-based company with $1.59 trillion in assets under management. “Inflation risk is underpriced.”
He recommended investing in corporate debt, some equities and the U.S. dollar, while staying away from shorter-term government debt.