When Nothing Is Something in Bonds
So it turns out nothing really is something in the bond market.
Big Wall Street firms may lament the persistence of zero interest-rate policies in the U.S., but they look downright ostentatious when pitted against Europe’s vortex of negative-rate policies. In the past week alone, the volume of negative-yielding euro-zone debt surged 30 percent, to a record 2.6 trillion euros, Bank of America data show.
That means investors are paying for the privilege to lend trillions of dollars to governments including France, Belgium and Germany. Spain can borrow basically for free now for two years. How does this make any sense?
The main reason investors would want to buy this European debt is if they were convinced yields were going to go even more negative. The surge has corresponded with increasing belief that the European Central Bank will take additional stimulus measures to ignite economic growth in the region. (There's also a foreign-exchange play involving the euro, for the daring.)
But this is a perilous road for bond investors and for the ECB. European central bankers will have to extricate themselves from these policies eventually, and as soon as investors stop believing that yields will continue to expand into negative territory, they will have no reason to hold onto the debt.
The selloff will most likely be sudden and violent, as it was in April, when 10-year German bonds suffered their deepest two-day loss in more than three years. That rout was driven by relatively little news; imagine how magnified the selling will be when it’s driven by a fundamental or policy development.
Some U.S. traders are becoming annoyed at the wishy-washy messages from the Federal Reserve, which is planning to raise rates from about zero, where they’ve been since the end of 2008. Chief executives at JPMorgan Chase and BlackRock have decried the low rates as creating a cycle of uncertainty and prompting consumers to funnel more of their income into savings, potentially creating an economic drag.
U.S. debt investors should count themselves lucky. While it may be annoying to parse through thousands of words for some inkling of meaning every time a Fed official speaks, it turns out that there’s something worse than almost nothing. It’s called actual nothing, with the promise of even more nothing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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