Negative Yields Have Turned Bond Trading Into a Commodity Market

Negative yields are upending bond investing.
Photographer: Andrey Rudakov

Negative yields have so contorted the global bond market that it's starting to look like a trading venue for commodities, according to JPMorgan Chase & Co.’s asset-management division.

The pile of debt yielding less-than zero is expanding as central banks gobble up assets to stimulate their flagging economies — a dynamic that has radically changed bond investing, according to JPMorgan's Oksana Aronov. Investors should now think of a negative-yielding bond as a commodity, remembering Warren Buffett's assertion that with commodities you are simply betting on what someone else might pay for them at some future moment, said Aronov.

As the amount of negative-yielding debt now exceeds $10 trillion globally, bonds increasingly cease to trade based on fundamentals, such as yield, and trade instead on what someone else might be willing to pay for them in the future. Bonds are effectively commodities, and investors are using the greater fool theory as an investing strategy.

That bonds are exhibiting commodity-like dynamics can be seen in a chart comparing the price of gold to Pacific Investment Management Co.’s Zero-Coupon Treasury ETF:

Sub-zero bond yields are causing all sorts of headaches for investors, since those who buy now and hold until maturity will receive less money than they paid. Yet buyers can also make some gains if yields on the bonds become more negative — meaning their price rises — and providing they can find a buyer. That's the theory of the greater fool.

Assumptions that yields will keep going lower may have been the reason investors were willing to buy 10-year bonds from the German government with an issue price of 100.5 euros in July,even though investors will receive only 100 euros at maturity, M&G Ltd fund manager Craig Moran said yesterday:

The possibility of selling the asset to someone else at a higher price (a greater fool) is predicated on hoping that having accepted a guaranteed loss of over 50 cents over the course of 10 years, someone else will be willing to accept an even greater guaranteed loss over a shorter time period at some stage in the next 10 years. It’s betting that bond prices will hit ever higher highs, and yields hit ever lower lows.

While the risks are clear many are willing to take them, as negative yields seep into more corners of the fixed-income market. And, it’s not just the newer phenomenon of negative nominal yields that are an issue; negative real yields — those adjusted for inflation — can "create just as much of a conundrum", said Aronov.

JPM yiled


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