DS are you stil around?
Would love to hear your thoughts on the current outlook. This whole concept of negative yield bonds has me confused - I don't understand why anyone would buy negative yielding paper - is the economy in that much trouble?
If it is, what do we do? Does negative interest rates infer gold is now a positive carry instrument?
Hi KH
I am still around. Just a whole lot less voluminous and doing some investment-related things which are taking up a lot of time lately.
Negative yields are something I thought was impossible to sustain. Up until this era, they occurred for very short periods during major banking crises. What do I know?
We now have over USD 10tr of issued bonds trading with negative yields. Most of this is government, some of it is corporate.
I'm with you. What a ridiculous concept to be paid to borrow. Why would anyone lend on that basis?
Yet, here are some of the reasons:
- The returns on other assets are worse (eg. you might think that equities, property etc. will record poor risk adjusted returns)
- Holding cash is more expensive (you need to guard it, stop it from rotting, insure it...)
- Inflation will be very low or even negative, giving acceptable real returns, even if low by historical standards
- risk weights on government bonds are zero for major banks and this encourages them to hold liquidity here are they try to repair their balance sheets slowly
- it is the result of deliberate distortion by central banks to make asset prices so high that, eventually, investors move to invest in real production like building new factories or otherwise encourage companies which are already doing this to expand further.
- government debt growth is now slower than it had been and reducing as a share of GDP. For high quality credit, it means that supply is not growing as fast as demand. This pushes yields down. This argument is offset by decumulation of reserves in China and Saudi Arabia.
However, it's not all working as might have been hoped although it probably would have been much worse without this support. Movement to the real economy has not been progressing as much as might have been hoped.
There are at least two key reasons which have been put forward for this:
1. The world is so awash with debt that key components of the economy just won't take on any more debt.
2. Things look so ridiculous that people use cash as an asset. Normally, cash is used for transactional purposes for the most part. In this world, people don't want to invest because it all looks so silly. Thus they hold cash (and other near cash stuff).
Gold is now positive, relative, carry.
The economy appears to be recovering in terms of employment, GDP and less so on inflation although this figure is positive for the most part. Central Banks are very uptight on the inflation figures because the Keynesian beliefs they hold dear suggest that people will not spend enough if they think inflation is low or will go negative. Yet much of the reason behind low inflation is due to commodity prices or things like steel. Outside of that, it looks mostly ok.
There is so much which is weird. The most obvious implication is that the risk premium for holding long dated bonds is probably not sufficient to justify holding much of them (I own no foreign government bonds). Further, if bonds blow out, equity won't survive so well (I have protection in place and risk budget the exposure to equities quite tightly). There are other things which become relatively more interesting to consider for an investor. These are known as alternative betas. I have been adding these to my arrangements and have one or two more to go.