$15 Trillion in Negative-Yield Debt
Excluding the US 44% of Bonds Have a Negative Yield
European Negative Yield Government Bonds
As of mid-June, over 50% of European government bonds have a negative yield. The total is higher now.
Negative-Yield 30-Year Bond
Yesterday, Germany issued a 30-year bond yielding less than 0%. Held to maturity you will not even get your money back.
Germany sold the world’s first 30-year bond offering a zero coupon, with an effective yield of -0.11%. Demand was pretty weak. @bloombergtv @queenofchartz pic.twitter.com/0rlq6LZyBx
— Lisa Abramowicz (@lisaabramowicz1) August 21, 2019
Logically this is impossible. But it’s happening. And Trump likes it.
So Germany is paying Zero interest and is actually being paid to borrow money, while the U.S., a far stronger and more important credit, is paying interest and just stopped (I hope!) Quantitative Tightening. Strongest Dollar in History, very tough on exports. No Inflation!…..
— Donald J. Trump (@realDonaldTrump) August 21, 2019
What Happens on Hundred-Year Bonds?
Austria has a 100-year bond that was trading at 116% of par on December 31 and 198% of par yesterday.
Note that if held to maturity, the bond would get about half your money back.
I asked Jim Bianco at Bianco Research a pair of questions.
- What happens if the yield very quickly rises to 0.25%, 0.5%, 1.0%, 2.0%?
- Same thing in reverse. What happens if the yield very quickly falls to -0.25%, -0.5%, -1.0%, -2.0%?
Jim responded that movement is not linear because of duration and convexity.
Convexity measures the degree of the non-linear relationship between the price and the yield of the bond.
Austria 100-Year Bond Example
Bianco Comments
- If the Modified Duration (green line) goes up and the Yield-to-Maturity (blue line) drops, the bond has “positive convexity”. Callable bonds like mortgages, because we can “pre-pay them when we re-finance, have “negative convexity”.
- The 100-year Austria bond is the longest ever recorded in history. The Modified Duration is now effectively 56.64.
- The orange line represents the price. On December 31, the price was 116.5. It’s now 198.1. That’s a year-to-date gain of 70%. Add is 8/12s of a 2.1% coupon and its total return is over 71%. This might be the best total return for an investment-grade bond in human history.
- You would lose over half your money if the Austrian 100-year yield “skyrockets” to the nose-bleed interest rate of 1.7%. What would cause that to happen? An economic recovery.
- So, yes the bond market is at risk of blowing up should Europe’s economy recover. That said, Germany all but admitted they are in recession which is why they are considering pump priming fiscal stimulus.
Bond Market Blow-Up
Clearly, no one intends to hold a 30-year negative-yield bond to maturity. Losses will be both steep and sudden should yields rise.
At some point the bond market is guaranteed to blow up. Timing the point is difficult.
Traders have been betting against Japan for two decades, incorrectly.
Negative Yield Madness
The 10-year Swiss bond yield of negative 1% implies it is better to have 90 cents ten years from now than a dollar today.
That is logically impossible. It would never happen in the real world without central bank intervention.
Yield vs Storage Costs
It’s important to distinguish between yield and storage costs.
One would expect to pay a small nominal storage costs for gold.
But if one lent gold, as opposed to placing it in a bank for safekeeping, the yield would never be negative or zero.
Lending Gold
Historically, banks collapsed when they lent more gold than they had rights to do so.
Lending gold that is supposedly available on demand is fraud. Gold cannot be available on demand if it is lent. The same applies to checking accounts whose money is also supposedly available on demand.
The bottom line is fractional reserve lending is a fraud. This is why I support a 100% gold-backed dollar.
Making Sense of the Madness
- Those buying 100-year bonds are betting there will not be an economic recovery.
- Those buying negative-yield bonds are speculating that yields will go even further negative.
Even though we can rationalize purchasing negative-yield bonds, the fact remains that negative yields are logically impossible and can only occur with central bank intervention and outright monetary fraud.
Gold vs Faith in Central Banks
What Gold is and Isn’t
In addition to being money, gold is primarily a hedge against central bank sponsored monetary madness.
If you believe central banks have everything under control, don’t buy gold.
However, negative yield bonds are proof of monetary madness.
Everything Under Control?
- “Zero Has No Meaning” Says Greenspan: I Disagree, So Does Gold
- 30-Year Long Bond Yield Crashes Through 2% Mark to Record Low 1.98%
- More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
- Inverted Negative Yields in Germany and Negative Rate Mortgages.
- Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid
If you believe monetary madness, negative interest rates, and negative rate mortgages prove central banks do not have things under control, then you know what to do.
Buy gold, but please understand what gold is and isn’t.
Gold is Not an Inflation Hedge
In contrast to popular belief, Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge in any meaningful sense with one exception (sustained high inflation including hyperinflation).
Gold has historically been money for thousands of years. Governments and central banks have not changed that fact.
Mike “Mish” Shedlock
Doesn’t negative yields point to everyone betting on the deflation of asset prices? If you only get 90% of you money back at maturity but everything has gone down in price 88% then your buying power is the same as if prices don’t change and you make 2% on the bond…
If this madness of negative and really low yielding government bonds continue in Europe for many years, how will European pension plans stay solvent?
The pension plans were not designed for money that is returning negative yields or below 1%,
In Europe 99% of pension funds are Pay as you go. There are no cash reserves anywhere but simply IOU. Yeah I know, crazy right
Frozen,
is that really true?
In the UK, government workers pension funds are paid for directly out of taxation. All private schemes are funded though, as well as being closely regulated.
I dont see how private company schemes in Europe could be unfunded? Cos if the company closes down the pension disappears unless someone who had nothing to do with the original pension picks up the tab. I can only guess that what you mean is that the state is involved in these schemes somehow?
What do you think would happen to the price of gold if interest rates moved higher? I am pretty sure gold is just a lt zero coupon coupled with a put on monetary sanity. I have been in a short gld long zroz position for a while and it has done very well. If you except my premise for what gold is then that would imply traders have gained more confidence in monetary authority.
Ughhh I have tried several times to replace except with accept and it doesn’t go through……
We’ve seen it in the past, and one thing did happen a few years ago…fake gold bars. I had friends in a large HNW European institution that found out about 1% of their gold holding were fake! That must of been an intersting board room meeting!
I agree and I disagree, the concept of “storage cost” only applies to small amounts and not large amounts. Also let’s not forget that getting a billion dollars in cash is expensive and heavy — most people don’t realize that $1 million dollars in $100 bills weighs about 10kg!
Also removing the US debt from the equation is like saying let’s look at world military spending, but not take account of the USA! It’s a meaningless exercise.
More interesting is what are the investors’ options when investing in bonds; they’ve got to invest since they cannot keep the cash (see above) and by the way what is a dollar — its a non-bearing interest rate note!
The only other option is to invest in other assets — hence the massive asset inflation of the past few years, then divide your bond allocation between the different players. As for the Austrian 100y — I get it it makes no sense, but then this is not a buy and hold instruments, the same way 30×30 interest rate swaps are not the hedge you think it is!
The A100y represents something very different, a betting instrument on the way of the economy (south as it turns out) hence the ridiculous upswing in price. Aside from the Austrians, I know the UK has been a massive issuer of 100-year notes, although not as spectacular because of the UK’s own “travail” I bet you they have high correlation to the A100y bond, because of what they do for a portfolio.
Still, the interesting thing is why are US yield still so very high (granted the yield curve has started to invert) but US short rates are still very much higher (is this a future play on a US dollar devaluation…) Who knows, but it’s interesting that the American treasury has to pay so much more than Germany to borrow.
As for the banks…they can just go and fu$k themselves. Nowhere is it written that they “deserve a margin” that’s the bank’s problem and guess what they will eventually find a solution
MISH
WHY does Germany even need to borrow money, after 40 years of being the EXport locomotiv of europe ?? same as Japan by the way
Here in Denmark, Jyske bank now charges deposits OVER 1 million euros a 0,60 % fee / or move more buisness to the bank.
Banks are charged – a 0,50 % fee at our national bank, so thats what is driving this.
Still, it must be less risky to have cash/instant liquidity at -0,60 % that buying a bond in a currency that might NOT be around in 30 – 100 years time, but GOLD will..)
Basically, it must be gamblers betting on the Danish kroner vs their own currency, like the British pound or EVEN the Euro, which we are NOT a part of, but locked to at 7,46 D kr / Euro.
Years ago, when explaining the so-called Great Recession, I suggested the cause was a chronic miss-pricing of risk. Inverted yield curves are great indicators of miss-priced risk. Logically, the farther out in time, the greater the risk (more unknowns affecting yields so a greater deviation). Failure will logically occurs at area of greatest risk–subprime, mortgage-backed securities, sliced and diced to hide the real risk.
I suggest the same explanation will be true for the 2019 Great Implosion. IMHO, the greatest risk in in corporate bonds from companies with high stock-buy-back rates–the lesson of leverage. The complication is near zero interest rates, and corresponding inflated prices. MIsh is 100% right–when the SHTF, be in gold.
How does this end?
In misery, ruin, bankruptcy, war and complete change of governments.
Agreed. In a few years when 50% of the currently-habitable land is uninhabitable, there will be a war that will make WWII look like a skirmish.
Take out a one million dollar loan at negative 0.5%. Pre-paybit, pocket $5,000. Repeat ad infinitum. Ka-ching! Money machine!
Won’t work. Most debt can’t be pre paid like a mortgage and if you took out a negative mortgage, most likely the fees would more than offset the negative interest.
KH,
I think he is talking about the absurdity of it. If you could actually get a NIRM, it would be a money making machine, which is why you, the small guy, cant get one in reality. And the reason why so many bonds are yielding negative interest rates is because someone at a central bank is using their money making machine to make some big guys rich at your expense.
I don’t understand how negative interest rates are fraudulent. The bond issuer is promising to pay fewer dollars upon maturity than the buyer is spending to purchase the bond. There is no fraud. The buyer knows they are being ripped off up front.
What about government laws requiring certain pensions to invest large sums into certain government bonds….those bonds are now yielding close to zero or even negative interest rates, which sets up the pension for a serious systemic problem when it was already on shaky ground.
Laws forcing purchases of negative yield bonds is atrocious but it isn’t “fraud”.
I guess that there is a distinction between what is legal and what is wrong. If there was no law saying that I couldnt hit you with a stick, then hitting you with a stick would be a ‘crime’ in the eyes of many, but not the law. Same thing here, Mish is calling this the result of ‘fraud’, and I agree, but it is not a ‘fraud’ as recognised by the law.
In other words, the law is wrong. People are being defrauded, but the law says that it is OK. By fraud, I mean that money and value is being transferred away from one group under false pretences.
This fraud is not only not recognised by the law, but is an incredibly complex one that would be difficult to prove in a court without an expert jury and a brilliant prosecution. The value is being taken from pensioners contributing into their retirement funds, and the value is appearing on the balance sheets of banks who are freely able to sell bonds that they previously bought. The reason for the fraud imo is that many banks in the EU are bust, and the ECB doesnt want to take them down like it should, and the governments of Europe dont want to bail them out.
As a result they have come up with this fraudulent solution. The idea is that the bad banks have some good assets in amongst their bad ones. The ECB prints money to buy those good assets, government bonds, and forces the price up and up until the yields go negative. The banks that they are trying to help, sell those bonds to the ECB, or simply mark the profit onto their books. In theory if they force up the price of bonds high enough, and bankrupt bank can become solvent again.
And as I said, the losers in this big fraud are the pension scheme members. When this fraud unwinds, as it must, it will be bondholders at that time (I am expecting insider bankers to unwind their holdings at some point) who lose massive amounts of value on their holdings. Sadly, pension schemes have legal obligations to hold these sorts of bonds and are forced to invest in a guaranteed negative return scheme.
And all of this is due to the Euro. The ECB wouldnt take part in such a scheme unless it was desperate to keep the Euro together. All they will end up doing of course, is making the disaster worse. The longer you allow the pressure to build up, the greater the bang at the end.
Technically, the bond issuer is paying more than they borrowed. The debt has a positive coupon rate. It’s the yield to maturity that’s negative because the price went up.
KH,
that may be true, but the buyers in the market are effectively receiving a negative rate of interest on all bond purchases right now.
What you say is true in the micro sense, but all of this takes place.in a macro environment of fraud (read: CB manipulation).
Yes, time value has been destroyed in Europe and Japan.
What did it buy them? Prosperity and happiness?
“Time preference can never be negative except by central bank manipulation and outright monetary fraud.”
That one might logically choose to speculate in negative yield bets via carry trades or the greater fool’s theory does not negate that simple “fact”.
And yes, I do mean “fact”.
The time value of currency is constantly being destroyed. The everyday Joe has heard about it, but ignores it… Just because. When they become “aware”, whatever that means today, gold will already be out of their reach.
“Nah, you are forgetting the currency component. “
I am not forgetting anything. You are speculating. Carry trades can and do blow up. If you are willing to bet on a carry trade now, be my guest. But even if you are, there is measurable risk.
I repeat – It is logically impossible for interest rates to be zero. It takes central bank manipulation and fraud.
Sure, it is speculating … and risky.
Just as it is investing in ANYTHING … including gold.
I agree with Mish. There’s no logical reason for a negative yield. The only explanation is CBs desperately trying to force money into the economy.
That doesn’t mean you can’t profit off the purchase of a negative yielding bond.
But the borrower pays back less money than borrowed.
“That is logically impossible.”
…
Nah, you are forgetting the currency component. Carry Trade. Borrow in depreciating currency and purchase asset priced in appreciating currency. Even if you bought a negative yield bond … and yield went positive … you (may) come out ahead if currency gain more than offset yield loss.
The bond market will not blow up; it is a black hole, governed by gravity and money flowing downhill. Implode is a better term. But count on other assets going first (equity and corporate bonds).
Yes.
If Treasury market ever “blows up” … it will only be after equities/corporates/RE/munis/beanie babies (oh wait, that already went …)
US Treasury market = castle keep
There is no bigger US treasury bond bull than I. None.
Rates going lower. A lot lower.
US = caboose
I remember reading about 100 year Japanese Mortgages as a child. I remember thinking that that country had lost it’s mind.
Now, it seems, everyone has lost their mind.
100 years ago there will still people alive who fought in the Civil War.
I suspect people will look back on this time in history with horrified amusement.
Negative rates are the penalty banks pay for liquid securities
The answer is easy. Bonds, JGB’s, etc are used as pristine collateral in repo as insurance against collateral haircuts and when perceptions tend towards the downside demand for safe collateral goes up
In an insane world we have “the best markets”
Here is a quote fro Kyle Bass that might explain the inverted yield curve in US.
“We’re the only country that has an integer in front of our bond yields,”
“We have 90% of the world’s investment-grade debt. We actually have rule of law and we have a decent economy. All the money is going to come here.”
He doesn’t know what an integer is.