There are now more than $13 trillion worth of negative-yielding bonds in the global market. Just the idea of it runs counter to logic, and yet the amount continues to grow. Two questions that we get often from investors are “How did we get here?” and “Could it happen in the United States?” I’m Kathy Jones and this is Bond Market Today.
It all started with the financial crisis. Central banks in Europe and in Asia pushed short-term interest rates to zero, and even into negative territory, to try to stimulate economic growth; and the idea was that if you’re penalized for holding cash then you’ll do something with it. So, consumers would spend it, businesses might invest it, and banks would lend it. Unfortunately, it didn’t really work out that well. Consumers by and large were not penalized by their banks for holding cash and, because of the depths of the downturn in the economy, they were still reluctant to spend. Similarly, businesses were reluctant to invest because demand was sluggish and had fallen so steeply. And then banks were actually penalized by the negative yields on bonds because they’re required to hold high-quality government bonds as part of their capital buffer, and with negative yields it actually eroded the profitability and their lending margins. So, they were less inclined to lend.
Over time, even longer-term bond yields began to move lower and fall into negative territory because of the slow pace of economic growth and falling inflation expectations and even deflation in some countries. So, now we have a situation with a lot of negative-yielding bonds, and a very difficult time foreseeing how we’ll come out of the situation.
Now, as to whether it could happen in the United States, our view is that it seems doubtful. For one thing, the Federal Reserve has said that it’s not a policy that they would like to pursue. They don’t see that negative long-term interest rates have had the results that would be term-successful. And secondly, they’re not even sure that it’s legal under their charter. So, we don’t think it’s a policy the Federal Reserve would likely adopt.
And secondly, the United States has had a more robust recovery than most other major countries. We don’t have deflation. Although inflation might be a bit below what the Fed is targeting, we don’t seem to have a deflation problem. So, we think that it’s not likely to happen in the United States, but one of the consequences for U.S. investors or investors in U.S. bonds in general is that because yields are so low around the world it tends to keep a cap on U.S. yields. They can’t really move up significantly when there are still so many negative-yielding bonds in the global marketplace.
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