Macroscope | The mystery of negative bond yields
Why on earth are investors paying for the privilege of lending money to governments?
Another week, another country with negative bond yields.
On February 4, Finland became the first European country to auction a five-year bond at a negative yield. The day before, benchmark German 10-year yields fell below their Japanese equivalents for the first time, and are currently trading at a mere 0.36 per cent – down from 1 per cent as recently as August.
According to JP Morgan, some US$3.6 trillion of government bonds, accounting for more than 15 per cent of JP Morgan’s global government bond index, are now trading with a negative yield. Nearly one quarter of euro-zone sovereign debt yields less than zero.
In June 2012, when investors feared that the euro zone was about to break up, Germany’s 2-year bond yield dipped below zero for the first time. Now, yields on Belgian, French, Dutch, Swedish, Austrian, Finnish, Danish and German debt are negative for maturities as long as four to six years.
Even a euro-denominated corporate bond issued by Nestle, the Swiss multinational, is trading at a negative yield.
Why on earth are investors paying for the privilege of lending money to governments and, more importantly, what does this say about the state of financial markets and the global economy?