$11 Trillion in Bonds Yield Less than Zero. Does It Matter?
The comments below are an edited and abridged synopsis of an article by Raul Elizalde
More than $11 trillion in world bonds currently trade at negative rates, so holders of these bonds expect to lose money. Remarkably, negative-rate bonds continue to be issued, and continue to be bought. This has caused some alarm among investors, but low rates may not mean much. Other indicators are more worrisome.
Negative-rate bond debt topped $12 trillion 3 years ago. To central bankers around the world, the fact that interest rates are once again in negative territory is disconcerting and worrisome.
Disconcerting because lowering rates and printing money have shown little success in lifting rates or creating inflation. Worrisome because low inflation can turn into deflation, a hard condition to fight.
Pundits complained that central bankers have depressed interest rates, punishing savers and creating market distortions. The implication is that, without such massive intervention, interest rates should find a higher, more normal level.
But the US 10-year note is back below 2%, just as it was before Fed started to normalize policy by raising rates and cutting its balance sheet.
Why is this happening? One explanation is that producing things has become cheaper, thanks to automation and globalization. Another is that technological advances have broken the link between wages and prices, which explains why salaries haven’t budged despite soaring employment. Slack in the labour force could be keeping wages low.
As rates sink, a bond market crash looms. But in the last 38 years, the link between rates and economic and stock-market performance has been weak. Rates fell throughout that time, while the stock market and economy went through booms and busts, regardless of where the 10-year US bond was trading.
Where rates are does not seem to mean much. Even negative rates have little impact, since we saw them three years ago in Europe and its economy did not collapse. But how various rate horizons relate to one another is a different story.
The fact that long-term rates have fallen below short-term rates has attracted a lot of attention in recent months, with good reason: Such inversions seems to take place before a recession and a stock market dip.
The difference between the 10-year and the 2-year government bond rates, as well as other interest rate measures, has recently narrowed sharply both in the US and Europe. While the negative rate environment may not be as meaningful, investors are wise to be concerned about where rate differences between maturities are headed.
