China Joins the Negative Yield Debt Club 

It's economic madness but China Borrows at Negative Rates for the First Time.

Superlow interest rates in Europe helped China to sell its first negative-yielding debt, as it raised about $4.7 billion in a three-part deal in euros.

The debt sale drew robust demand, aided by China’s rapid return to economic growth after tackling the coronavirus and the relative scarcity of Chinese bonds denominated in the common currency. 

The deal was worth €4 billion, the equivalent of $4.74 billion, and split between 5-, 10- and 15-year bonds. The 5-year bonds were priced late Wednesday to yield minus 0.152%, while the 10- and 15-year securities were sold with positive yields of 0.318% and 0.664%, respectively.

Logical World Impossibility

In the logical world this is impossible. 

It implies a negative time preference in which one would rather have 90 cents a year from now than a dollar today. 

On the greater fools theory, investors bet that central banks will continue to drive down yields and they will get even more negative.

Others find China attractive because the rate in China is less negative than euro-denominated rates in the EU.

Interest Rate Trap

Central banks that pursue this madness find themselves in a trap they do not know how to get out of.

Spotlight Japan

Japanese Real GDP vs 10-Year Yield

Neither low interest rates, nor QE, nor wasted fiscal stimulus promote growth over the long haul.

Japan tried all three for decades. The results speak for themselves, recession after recession. 

Hello Fed, Low Interest Rates Do Not Promote Growth

I discussed this recently in Hello Fed, Low Interest Rates Do Not Promote Growth.

Zombification

Instead of promoting growth, artificially low interest rates promote zombification. 

Unproductive companies are artificially kept alive at the expense of more productive companies.

  1. December 16, 2017: Zombie Corporations: 10% of Companies Depend on Cheap Fed Money
  2. July 19, 2019: Zombification Perfected: Negative Yield Junk Bonds Take Hold in Europe
  3. November 18, 2019: China, like Japan in the 1990s, Will Be Dominated by Huge Zombie Banks

What Will the Fed Do?

The Fed understands the negative rate trap and it can see the problems facing the ECB and BOJ.

But the Fed may try something even worse. One possibility is direct printing, making the Fed's liabilities legal tender or a medium of exchange.

Bond Bull Lacy Hunt Warns of a Huge Monetary Risk

I commented on the legal tender possibility twice. Both are worth a review.

  1. Aug 18, 2020: Bond Bull Lacy Hunt Warns of a Huge Monetary Risk
  2. October 22, 2020: Two Inflationary Tail Risks For US Investors

Mish