Negative Yields: The World Turned Upside Down

Negative Yields: The World Turned Upside Down

Negative yielding bonds are a curious phenomenon. With somewhere around $13trillion in negative yielding bonds outstanding in the global marketplace today, who and why would anyone buy these bonds? Well the answer is “it’s complicated” and it also may surprise you.

First, lets address the bigger picture about these bonds:

  • Most of the negative yielding bonds have been issued by governments such as Japan, Germany, France, Spain and Austria. Central banks are pushing money into the economic systems to fuel economies and preempt recessionary fears. Lowering interest rates is the primary lever central banks have to combat potential recessionary risks.
  • Some of these strange bonds have been issued by high quality European corporations. These corporations are taking advantage of low-cost debt for various purposes such as share buy-backs, to fund operations, for capital expenditures as well as for R&D.

Why oh why would anyone buy these bonds?

  • Buyers of these bonds are often seeking quality, liquidity, and alternatives to volatile assets like equities. There simply are not a lot of alternatives.
  • Some buyers of these bonds also don’t have very many options, in other words they are captive buyers of negative yielding bonds.
  • Some buyers are making a wager that the central banks will push yields even lower, driving prices even higher. This is a shorter-term tactical exposure to negative yielding bonds.
  • Other buyers are overlaying negative yielding bond exposure by using currency swaps overlays. The goal of these swaps is a positive cash flow when all is netted out. This is not feasible in all cases and can be costly.

So who buys these bonds?

  • Banks: Banks have obligations to maintain high quality assets to offset liabilities. Exposures to high quality government bonds, even negatively yielding bonds, helps them maintain their required regulatory ratios. European banks are “captive” buyers of negatively yielding bonds as a result of these ratios.
  • Pension funds: These funds need to own high quality and liquid assets to offset future obligations.
  • Insurance companies: Insurance companies own negatively yielding bonds to ensure they have funds to meet future liabilities.
  • You and I! Yes, if you own a global bond index ETF or and index fund you probably own negatively yielding bonds. Index rules are designed to meet specific objectives such as exposure to hiqh quality global bonds. In that circumstance, the index is selecting bonds for inclusion based on quality and diversification….not the yield. The fund or ETF tracks the index and follows suit. The result: surprise, you own negatively yielding bonds!

Click here for a print friendly version of this report.

Copyright © 2019 Rieger Report LLC. All rights reserved. Redistribution in whole or in part is prohibited without written permission of the Rieger Report LLC. All information provided by the Rieger Report LLC is for informational purposes only, impersonal, and not tailored to the needs of any person, entity or group or persons. It should not be considered financial advice. The Rieger Report LLC receives compensation in connection with licensing its research, advertising on its website, speaking and consulting services.
Past performance of any investment product or index referenced in the Rieger Report is not an indication of or guarantee of future results.
The Rieger Report LLC is not an investment advisor, and the Rieger Report LLC makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle. A financial advisor should be contacted to determine what may be best for your individual needs. The Rieger Report LLC is not a financial or tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. No legal relationship is created between you and Rieger Report LLC.
The Rieger Report LLC does not act as a fiduciary or investment advisor. While the Rieger Report LLC has obtained information from sources it believes to be reliable, the Rieger Report LLC does not perform any audit or undertake verification of any information it receives.
The Rieger Report Rankings and model portfolios are opinions of relative ranking among the peer group analyzed as of the date expressed and not statements of facts. Rieger Report model portfolios are intended for illustration only. Any opinion or analysis decisions are not to be construed as recommendations to purchase, hold or sell any securities or to make any investment decisions, and do not address the suitability of any security. The Rieger Report LLC does not assume any obligation to update the content in this publication in any form or format.
Your use of any information from this document or presentation is at your own risk and without recourse against Rieger Report LLC, its members, managers, or employees. To the maximum extent permitted by law, Rieger Report LLC disclaims any and all liability in the event any information, commentary, analysis, and/or opinions prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.Municipal Bond ETF Model Portfolio
Rebalance for Q1 2019
Click the above image to enlarge.