Mike Amey never thought he’d buy bonds from countries such as Germany and Switzerland when losing money on them was all but guaranteed. Then again, these are hardly normal times in the bond market. Europe faces a prolonged bout of deflation, and signs abound that global growth is weakening as oil prices plummet. Some clients are more than willing to lose a little money in return for the security of government debt, says Amey, a London-based fund manager at Pacific Investment Management Co. “It’s not a good feeling,” he says.
Bond prices are so high that yields on about $3.75 trillion of the developed world’s more than $24 trillion in sovereign debt have turned negative as of Jan. 26 (bond yields fall when prices rise). That means investors effectively pay for the privilege of lending money to a dozen countries including Germany, France, and Japan. Benchmark yields in all 25 developed nations tracked by Bloomberg have fallen this year. “It’s a unique situation,” says Oliver Eichmann, co-head of fixed income at Deutsche Asset & Wealth Management, Germany’s biggest fund manager. “We try to avoid buying or holding negative-yielding assets. This is something new and something we have to get used to.”