In 10 years time, what will we think about negative yields?
Chart of the year so far comes from JP Morgan via David Keohane.
$5.5 trillion of advanced economy government bonds with a negative yield. That’s 24% of the JPM Global Government Bond index. And that’s as of last week.
Here’s another way of looking at the same phenomenon, via Deutsche Bank:
Even the yields that are still positive are at or near historical lows — the yield on the US ten year is down from just over 2.2% on the eve of December's Fed hike to under 1.9% today. UK ten year gilts are yielding 1.49%.
What on earth is going on?
Partially this is general feature of 2016’s grim start to the year; crashing stocks and collapsing oil driving a move into the perceived safety of government bonds.
The Bank of Japan’s surprise cut into negative territory has given these moves a jolt which is being felt well outside of Japan. As JP Morgan explained:
The BoJ reinforced this year’s decline in global government bond yields even as risky markets rebounded. The rally was not confined to JGBs, but spread across core government bond markets in anticipation that the search for yield will leak out of Japan into European and US government bond markets. That leakage has been strong over the past year. During 2015, Japanese investors bought on average $2bn per week of foreign bonds. Today’s shift in BoJ policy will most likely strengthen Japanese investors’ foreign bond purchases going forward.
(As an aside this spillover is important: it reminds us that for all the focus on central banks using monetary policy to drive down currencies in “competitive devaluations” we don’t necessarily live in a zero sum world. Monetary easing in, say, Japan might drive down the yen (although all is not going according to the plan) but is also eases monetary conditions in Europe).
Maybe the world economy really is about to fall off a cliff — although I don’t see it myself. Maybe there’s a deflationary wave from China about to swamp us all — and again, the chances of that have risen but it doesn’t feel like it should be anyone’s base case. Or maybe this is just the natural end game of monetary easing in Japan and Europe which is being forced into ever more inventive and unorthodox policies.
Perhaps this is all justified. Take Italy, maybe 1.55% is adequate compensation for ten years’ worth of periphery Eurozone risk with a starting debt/GDP ratio of 130%+.
I could of course have written something similar about Japanese yields at almost any point in the past 20 years. And those yields have just grinded lower.
I may have an illogical hang-up on the roundness of zero. I’m perhaps stuck with a twentieth century mentality that says that rewards for bearing risk should generally not be negative.
There are plenty of reasons to think that central banks policy rates and real interest rates are going to be lower in the future than they were in the past: take your pick of secular stagnation, a Rogoff-ian debt supercycle, a Gordon-esque supply side shock, a balance sheet recession, the global savings glut, etc, etc.
Plus, there’s the three and half decade trend of falling real rates in advanced economies. We are to a extent conditioned to not be surprised by real rates that keep falling (even if we never quite expect them to).
But for all the arguments I’ve read as to why real rates should stay low, I’ve not read anything that’s convinced me they should be this low.
So when I look at the chart and table at the top of this post, I’m left wondering how this will all look in ten year's time.
Either, this will be the start of a brave new era in which we come to accept that sovereign yields can often be negative, that there’s nothing especially special about zero — or, people will look back and say “what on earth was everybody thinking?”
Anyway… here’s a compilation of Pets dot com Superbowl ads.
