[ad_1]
FRANKFURT, Germany (AP) – Imagine lending money to someone and paying the privilege of doing it. Or be invited to invest and informed of how much money you will lose.
This sounds absurd, but more and more, it's the global bond market today. A growing share of government and corporate bonds is trading at negative interest rates – a zone of financial crisis that has emerged after the financial crisis and has accelerated, fearing that the trade war between states And China do not hurt a fragile global economy.
On Wednesday, for the first time in its history, the German government sold 30-year bonds at a negative interest rate. Bonds do not pay any coupon. Yet auction bidders were willing to pay more than the face value they would receive in return for the maturity date of the bonds.
The sale has added to the mountain of negative bonds around the world that investors have swallowed, suggesting that they expect global growth and inflation to remain below the normal for the coming years. After all, accepting a negative return on a bond – actually accepting money in exchange for parking money in a safe place – may reflect the expectation that returns will sink further into negative territory.
"You basically pay warehouse fees by paying these negative rates," said Jim Bianco of Bianco Research in Chicago.
Global debt with negative rates climbed to $ 16.4 trillion from $ 12.2 trillion in mid-July and $ 5.7 trillion in October, said Bianco.
"A few months ago, the negative return debt was an interesting curiosity," he said. "In the last three months he has become a pillar of the market."
The phenomenon of negative returns – 87% of which in Europe and Japan combined – is above all a sign of pessimism for the future.
"It sounds like a temperature gauge for the economy, which says the economy is sick," said Sung Won Sohn, a business economist at Loyola Marymount University in California.
The bond market also meets expectations that many central banks, such as the Federal Reserve and the European Central Bank, will react to the economic weakness and trade conflict raging between the US and China by further stimulating the downturn. interest rates. The ECB has indicated that it could decide on a stimulus package as soon as it meets on September 12th.
Despite its good credit rating and demand for its bonds, Germany is an important part of the Eurozone growth problem. The German economy contracted by 0.1% in the second quarter and could swing into recession with another quarter of declining production.
Negative rates are not just an indicator of economic distress. They can also cause problems in the financial system. They prevent banks from generating profits or insurance companies to finance their future payments.
"Why would you lend money when you can not win?" Said Sohn.
Indeed, bank stocks fell – 24% in Europe and 23% in Japan – over the last year.
Most of the negative-return debt consists of government bonds, in part because they are considered extremely safe. But there is also about $ 60 billion of US corporate bonds in negative territory.
The US government's debt is similar: the yield on the 10-year Treasury note dropped to 1.57% – a rate that would be negative if inflation were taken into account. Japan has been stuck in years of low inflation and low growth. And growth rates in Europe have slowed in recent quarters.
German bonds are the best candidates for negative rates. The financial strength of the country means that investors seeking security will receive at least the bulk of their money. German 10-year bonds have a negative return of 0.69%. Belgium, France, the Netherlands, Denmark, Sweden and Spain are among other countries with negative returns on government bonds.
What was particularly unusual in the sale of German bonds was its long maturity. As everyone who has bought a bank CD knows, their interests are all the higher as their money is blocked for a long time. However, bond yields are falling not only for short-term issues but also for longer-term bonds.
Negative returns from German bonds fueled the debate over the government's insistence on managing budget surpluses and avoiding new debt, even though the government could borrow to spend more on roads and bridges and get paid to do so. .
Economists and external figures such as the US Treasury and the International Monetary Fund believe that Germany could support national and international growth by spending more. The German economy contracted by 0.1% in the second quarter, slowed by the slowdown in world trade and the adjustment of the automotive sector to strict emission standards and new technologies.
A small mathematical link helps to understand things. Bond yields and prices move in opposite directions. If investors think that inflation and interest rates will exceed the levels currently reflected in bond yields, they can sell the bond, which increases its yield. Conversely, the demand for bonds – as we are seeing now – is driving up the price and lowering the yield. The more investors anticipate low growth and low inflation, the more willing they are to buy low yield bonds. They can make good returns from rising bond prices, even when yields are negative.
Central bank purchases are one of the main reasons for lower yields. The European Central Bank bought EUR 2.6 trillion worth of state bonds and companies as part of a stimulus package completed in December. With the economic situation deteriorating, the bank said that these purchases could begin again.
In addition to its sign on the economy, negative returns can make it more difficult to finance savings for retirement. High bond prices reflected in low yields also increase the possibility of a fall in the bond market if the sentiment changes.
This could happen if the economies of Europe and Japan started to regain strength and if their central banks canceled their easy money policy.
"The worst thing that can happen for these bonds is, God forbid, the economies are recovering," said Bianco.
____
Wiseman contributed from Washington.
[ad_2]
Source link