FYI: Bloomberg shared a graph recently that shows there is now $13 trillion of negative-yielding government debt in the world:
More than half of European government debt now has a negative yield.
I’m still trying to wrap my brain around this so here are some questions rattling around my head about this one:
Remember the European debt crisis of 2010-2012 or so? Remember how high their interest rates got? Greek 10-year debt hit yields of more than 30%! It’s now down to 2% or so. Spain saw 10-year yields hit almost 7% in 2012 which are now approaching zero. Ireland’s 10-year yield was north of 11%. It’s now basically zero. Italy went from more than 7% to negative 1%.
How the hell did this happen?!
Which environment was more mispriced — the high yields back then or these new low yields?
Regards,
Ted
http://awealthofcommonsense.com/2019/07/my-questions-about-negative-yielding-debt/
Comments
However, the topic of neg-yield debt is interesting. Here are my questions:
1. Is it possible to short neg-yield debt? If so, then presumably, the shorter would receive proceeds for the shorted instruments up-front, but would also be paid a (modest-) yield by the party who is holding the shorted bonds. Is that right? If so, I can see somebody like Pimco engaging in this activity with great effectiveness. The danger I suppose would be that neg-rates go even more negative..
2. Neg-rates seem to be the "new normal" in much of the developed world. That being so, why not use these rates to de-lever sovereigns globally, as follows: Sovereign govts and their respective CBs could agree the govt could issue "perpetual placement" bonds in 100 billion denominations (yen, dollars, Euros, etc), which would be purchased by the CB of each sovereign. These "PPP" bonds would yield interest of $1 (one dollar, yen RMB etc) per annum (effectivly zero interest). Being perpetual, there would never be any need to worry about maturing debt. The proceeds could be used to redeem public, interest-bearing debt. In this way, sovereigns could effectively de-lever.
Inflationary? Well, its the lack of inflation which seems to be the problem. I think issuing PPP debt makes more sense than paying premiums to private bond-holders (enriching them, but doing nothing to get money in circulation). And the reduction of most sovereign paper would push private investment into the productive sector.
3. "How did we get here?" - By that I mean persistent risk of deflation, There are many culprits: offshoring of jobs by MNCs from the developed world to EM has definitely suppressed incomes of those NOT in the top 5%. In fact "lower inflation" was one of the mantras pushed by the globalists. Well, they got it. In spades. Declining/negative birth rates are another factor. Feminism -- by disrupting household formation patterns which have existed for thousands of years and through "family planning" is killing the developed world both in the present and over the next several decades.
But I will say that debt is a major factor. Issuance of debt permits acceleration of consumption, which would otherwise be deferred. Global debt-to-GDP is ~ 230% and growing. So 230% of this years global consumption was already pulled forward (into prior years). We now sit in that future, where, what should have been today's consumption/demand was already satisfied. Of course there is insufficient demand --- the demand has long since been satisfied. Today's demand has been "robbed" by the past, just as we in turn are "robbing" economic vibrancy in the future to keep the music playing today.
Thoughts?