Negative Bond Yields - All the Talk

“Some $14 trillion in global sovereign/government debt now offers negative yields and the U.S. could soon be a part of that legion, according to Joachim Fels, a global economic adviser for Pimco.” With 25% of the worldwide market now trading at negative yields, there’s a lingering fear of the potential endangerment of the way the global economy is intended to function. Between the US-China trade conversations, a shift in demographics, and an immediate reaction to blame the global central banks, the amount of global debt with negative yields continues to grow behind an economy that seems to be getting slower by the hour.

Historically speaking, people will give the government their money with the hope of being paid back with interest. With the current state of the economy, people are becoming increasingly desperate to protect their money causing the government to essentially be compensated for borrowing it. While bonds are intended to pay the owner interest to get the money into the government’s hands, it seems that right now, quite the opposite is happening or we’re at least headed in that direction. Currently, investors are getting back less than their initial investment for the “perceived” safety of owning what’s estimated to be $14-$15 trillion in government-backed debt. See below as example of global debt trading at a negative yield:

Bloomberg’s current bond pricing at the time of this article:

Germany 2 Year Bond: -0.9023%

Germany 10 Year Bond: -0.577%

France 10 Year Bond: -0.2719%

Japan 10 Year Bond: -0.223%

This conversation is particularly fresh given the Fed’s rate cut last week, the first since 2008, and the potential lingering for another cut at the Federal Open Market Committee’s meeting next month. While the idea of negative yields and less-than-ideal return on government investments certainly sets a negative tone for this impending cut, we feel inclined take a step back and look at a refreshing angle of the Fed’s movements and its part in government bonds. Simply put, what goes up must come down, and the economy is no exception. While in a perfect world the economy would rise perpetually, it’s not natural and it’s certainly not going to perform the way we wish it would.

In our opinion, nature is taking its course in the living, breathing economy. Perceived economic downturn is just that- perceived. A slowing economy is a self-cleaning one, taking time to catch its breath and right any wrongs from a long-term perspective instead of immediate results. We, as professional investors, need to determine which is more important- keeping pace with our global counterparts, or ensuring that this long-term mindset is front and center.

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