Why is negative yield debt a problem?
Debt is commonly considered a safer investment than stocks.
Very large investors like central banks, sovereign wealth funds, or large private equity funds buy these debt instruments for security and a small yield.
With negative yields, these investments are off the table.
These funds could go down the value chain and invest in top tier blue-chip bonds with perfect credit ratings. But, as shown by Bloomberg, 24% of those bonds also have a negative yield.
There’s just no place in the bond market to earn a safe, sustainable yield.
Nothing to See Here – Everything is normal in the crazy land of interest rates
A second problem lies in national monetary policies.
Zero-interest rates are effectively money printing presses. This has the potential to cause widespread currency depreciation in the denominated currency.
To show how desperate investors are for yield…
- At the recent Italian bond auction, demand for the 50-year bond with an interest rate of 2.90% was 6 times oversubscribed.
The European Central Bank (ECB) has been a strong advocate for monetary stimulus and lower-for-longer interest rates.
The ECB will likely appoint Christine Lagarde as the new head of the Bank.
She is not a trained economist but ran the International Monetary Fund and was the Head of Finance for the French Government.
She is very pro-monetary spending and supports low-interest rates. As such, I just don’t see the ECB changing their path.
In the United States, you have President Trump who comments every other day on Twitter about how interest rates are too high.
He’s also made several nominations for FOMC members (the fed rate-setters) who would be advocates of ultra-loose monetary policy and even the gold standard.
Fed Chairman Jerome Powell is likely backed into a corner at this point.
And the market is forecasting a nearly 100% chance of a rate cut in July.
Making money in a negative yield market
There are a couple of ways to make money.
You can buy the 50-year Italian bond like many others and earn a whopping 2.9% before inflation.
Or you can buy a safe, stable commodity like gold. Over a thousand years of history has proven that gold is a safe haven to protect yourself from the lunacy of the ruling party. History always rhymes.
And in a race to currency deprecation, it’s always a good idea to have an asset which will move opposite the direction of the currency.
I think it’s probable that central banks and major institutions look at gold as a place to rotate some capital to.
In fact, many central banks have been active purchasers of physical gold over the past few years.
Which central banks own the most gold?
Gold is an important part of many central banks’ foreign reserves. Below is a chart that shows the top 20 central bank gold holders. |