In a frenzy fueled by Central Bank stimulus on worries about slowing economy, many of the benchmark treasury yield across the globe have went to record low while some have even delved into negative territory.
When an economy is slowing and faltering, it is common practice that the Central Bank exercises monetary policy to cut interest rates. The objective is to make saving less attractive and for people and companies to spend more, henceforth boosting the economy in process. The problem starts to surface when the economy isn’t growing as fast as they would like but money is being forced to stuck in increasing asset bubbles territory.
The negative territory in Japan and Swiss in particular is particularly fascinating to me because it clearly indicates that demand and supply is not balanced. What the negative yield is telling us is to go out there and invest in riskier assets because if you are going to keep your money in safe haven government bonds or deposit, then you will need to pay for it. The “premium” above the face value one pays for a zero coupon cash flow is a perceived likelihood of higher return of invested capital. Apparently, there’s a lot of demand for it.
Just take a look at the picture below of how it has pans out over the years.
Bill Gross mentioned in his interview yesterday that the multi-Trillion of negative rate bonds is a bubble which will explode big one day. Given how these nations are expanding their monetary policies aggressively, we can only assume that the financial system has become even more leveraged than it was in 2007 at the beginning of the last GFC crisis.
These floating bonds, including some junk bonds, are mostly time-bombs which have been misallocated and all it takes is one fine event to create a domino effect on default cases on these companies or countries. These seem to suggest that history will repeat itself once again, as it always is.