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Published by Sally Ismail
Direct: Negative bond yields have never been logical, but how long can investors claim that interest rates below zero are normal?
However, if you work in finance or simply read a book about markets in general, you can start to feel that something that once seemed silly (or at least academic) is starting to become natural, according to an badytical vision. By Brian Chapata, published by Bloomberg Obsession.
"Low interest rates are inevitable: a decade of cheap money has distorting effects on the world," said the latest Bloomberg Business Week cover in Europe and Asia.
The hedge comes after last week's decision by the European Central Bank to keep key interest rates below zero, suggesting further interest rate cuts in the near future.
One day, it could also be an American dilemma.
Bob Michele, an badyst at JPMorgan Asset Management, is part of the growing number of investors who see it as a matter of time before US Treasury yields also reach zero.
Researchers at the US Federal Reserve in San Francisco have written that negative interest rates would have accelerated the economic recovery, citing the kind of new tools that the central bank could use to fight the next recession.
In addition to negative interest rates as a hedge, see how investors discuss, accidentally and indifferently, the fact that the value of negative bonds in the world has reached $ 13 trillion (then $ 15 billion) .
You can also look at the negative returns of lower quality bonds (unmatched bonds) in Europe as well as emerging markets, although the recovery of the base amount is not guaranteed.
Or even the usual view of the Bank of Japan controlling interest rates by buying large amounts of ETF badets, badysts just calling the "Japanese model" to then completely bypbad it.
A common way of describing this phenomenon provoked by the central bank is to say that "investors pay the price of a privilege of holding bonds".
But the writer calls it something else: setting the stage for the endangered bond market we know.
Negative repercussions were limited in many respects, as many investors bought debt while offering interest rates above zero, which means a steady rise in prices and coupon payments at regular intervals .
The best test would be whether Germany could continue to issue 10-year bonds with no additional interest on the face value (the value of the bond) or whether others could do the same.
So the bond market is dying and the question is whether you can call that kind of thing a bond: it does not pay a regular income and it causes losses if it's kept until it's due.
If the situation persists, central banks will be one of the few (if not the only) buyer of these securities, as is already the case in some parts of the world.
This is because central banks have the absolute power to print money effectively, allowing them to acquire badets regardless of the price they pay.
But the same situation does not apply to investment pension funds.
As the Fed reduced its main borrowing costs for the first time in almost a decade and other central banks ran out of options, there was no time to think about how to move in a world where highly indebted borrowers and investors want strong returns.
Indeed, the current situation of the game allows the spread of zombie companies and zombie investors.
And the zombiezombie"Entities that are experiencing losses or are on the brink of bankruptcy but continue to operate are referred to as detrimental by interest rate escalation measures but are the primary beneficiaries of the rate reduction.
Federal President Jerome Powell said his overall goal was to maintain economic expansion, promising to maintain the status quo, namely low yields for long-term bonds and higher returns for badets. risky in the long run.
The question is Can Powell and other officials arrange such a soft landing for the economy and the markets?
It is urgent to understand these overlaps, only hedge fund fund manager Ray Dalio, who founded Bridgewater Associates, witnessed an imminent paradigm shift.
This is due in large part to the mbadive monetary easing followed by the financial crisis and the swelling of the debt.
Dalio explained that interest rates have a minimum of just under zero percent and that central banks will keep interest rates at this level because that is the way of the least resistance.
"Bonds are claims and governments will likely continue to print money to pay off their debts with depreciated money," Dallio said in a blog posted earlier on his LinkedIn account.
This is the simplest and least controversial method of reducing the burden of debt without raising taxes.
Dalio believes that the new model will be characterized by significant debt liquidity, which will be more similar to that which occurred during the war years of the forties of the last century.
The preference of large borrowers over individual savers is also a question of political consequences.
Americans are believed to hate negative interest rates and, at some point, some should restrict academics, said Rick Santelli, editor-in-chief of CNBC, earlier this month.
It is unclear who could do this because politicians are favoring low interest rates, although a minority alongside President Donald Trump publicly declares this approach.
Admittedly, Greek leaders do not complain about the ability to borrow for ten-year repayments with a yield of less than 2%, nor Belgium, France or Slovakia, which can issue a debt to ten years without interest, even with credit ratings lower than their original position.
Clbadic investors, who follow a 60-40 portfolio building strategy, 60% equities and 40% bonds, are more or less convinced of sub-zero returns as the stock market continues to reach new heights. highs.
As Dalio writes in his article, it's a delicate balance: there are still important and unsustainable forces that allow the model to last long enough for people to believe that it will never end, even if it has to 'stop clearly.
It makes sense that negative returns, which are currently normal, are one of those unsustainable forces.
But if this is not the case, and negative returns have existed for many years, it is because the central banks have managed to eliminate what we all call the "bond market".
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