Negatively-Yielding Debt Surges to Record Levels

Negatively-Yielding Debt Surges to Record Levels from Schiff Gold

The total amount of negatively-yielding debt globally surged to more than $13 trillion for the first time ever late last month.

The amount of negative-yielding bonds has grown precipitously since the Federal Reserve did a monetary policy 180 with the Powell Pause earlier this year. The European Central Bank poured fuel on the fire last month when it hinted at new rate cuts or even another round of quantitative easing. Since then, Austria, Sweden and France joined other countries with 10-year bond yields below zero. Meanwhile, Japanese and German rates plunged to all-time lows.

To put this into perspective, in early 2018, the total value of negative-yielding bonds globally stood at around $5.7 trillion.

The average yield of the global bond market now stands at just 1.76%, down from 2.51% in November last year.

As the Financial Times put it, negative bond yields were once considered to be “economic lunacy.” Today, nearly 40% of global debt delivers a negative yield, according to analysis by Bloomberg.

We’re also seeing a precipitous rise in negatively yielding corporate debt, according to Bloomberg. It now comprises nearly a quarter of the investment-grade market.

And as companies take advantage of low interest rates to borrow more, issuance has helped drive junk bonds outstanding to more than $1.23 trillion, more than double the level a decade ago.”

It’s basically a function of supply and demand. As more people seek the “safety” of government bonds fearing economic turmoil, bond prices rise. Inversely, yields fall.

Here’s the $64,000 question: why are people pouring money into negative yielding bonds? At some point they are going to figure out losing money over time isn’t a great investing strategy. Perhaps at that point, they will turn to precious metals.

In fact, there is a strong correlation between the rising level of negatively-yielding debt and the price of gold, according to the World Gold Council.

As global yields continue to fall, and in some cases turn negative, there appears to be a direct correlation between global net negative yielding debt and the price increase in gold, highlighting that as yields decrease, the opportunity cost of holding gold decreases making it more attractive.”

Most people expect the Federal Reserve to begin cutting rates this year. Peter Schiff has been saying that the next move after that will be another round of QE. This means we will likely see the amount of negatively-yielding debt continue to grow.

 

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.