Zero-Yield Bonds Shunned as Untouchables by BBVA Private Banker

  • Chief investment officer steers Spain clients away from bunds
  • Ultra-low yield is ‘traumatic’ for industry: Marazuela

Bonds yielding less than zero percent, even benchmark German debt, are no place for the very wealthy to be.

That’s the opinion of Enrique Marazuela, chief investment officer at Banco Bilbao Vizcaya Argentaria SA’s Spanish private bank in Madrid, which manages 17 billion euros ($19 billion) and focuses on investors with at least 1 million euros.

“This a game that you shouldn’t play,” Marazuela said in an interview. “Our business is wealth preservation, and we strongly recommend our clients not hold German or other core bonds now, like Dutch or Austrian.” The yields on 10-year government bonds from those nations are all less than 0.3 percent, and their five-year securities have negative yields.

The “game” that he steers long-term investors away from is buying securities with a negative yield in the hope it goes even further below zero, producing a capital gain. It’s tempting because gains from a swift move down in yield are magnified in low- or no-yield debt of longer maturities. This investment category has swelled in size in the last few years in Europe and Japan.

“The markets are saying, ‘This time it’s different, that we’re going to have very loose monetary policy for a long time,”’ said Marazuela, who’s managed money since 1987. “But the truth is, central banks will change monetary policy -- and if I’ve bought a German bond earning zero percent, and yields go back to around 4 percent -- which is about where they should be when we have 2 percent inflation again -- the price loss will be more than 25 percent.”

Germany’s five-year note yielded minus 0.50 percent as of 4 p.m. London time. The yield on benchmark 10-year bunds was 0.041 percent, up from a record minus 0.205 percent in July. During the selloff this month in longer-dated securities, German 30-year bunds fell almost 6 percent in the first six trading days, based on closing-price data.

As the Bank of Japan, the Federal Reserve and the European Central Bank took turns unleashing unprecedented asset-buying programs to kick-start their economies over the last decade, yields on more than $10 trillion of government, corporate and securitized debt plunged below zero.

That has upset business models in the insurance, mutual fund and wealth-management industries. It’s pushed Marazuela into recommending bonds from emerging-market governments and corporations -- despite their added risk.

“This is traumatic for private banking,” he said. “Fixed income is the main building material for our investors, who are usually quite conservative.”

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