Government bond yields are increasingly negative, the markets realize this -- and people are still buying them.
- Here are some links below that discuss this development:
- Negative-Yielding Bonds Proliferate -- Trefis
- http://www.ft.com/cms/s/0/43c51ee0-a...#axzz3QV4LBqGq
- How to profit from negative bond yields.
- Owners of Negative-Yield Sovereign Debt Say They?re No Fools - Bloomberg Business
- Nearly a quarter of euro zone government bonds offer negative yields - Tradeweb | Reuters
Why are people buying them? As this ZeroHedge article discusses, a few main reasons:
1. Currency Appreciation: many of the bonds with negative yields have currencies that are rising in value. For instance, the jSwiss franc has a negative yield, but it's also rallied more than 30% against EUR over the past month, which makes the negative yield a fairly trivial cost to pay.
2. Carry Trade: As rates go further and further into negative territory, borrowing a bond with a very negative rate to buy a bond with a less negative rating could still result in a positive yield. For instance, big banks holding funds at the ECB are paying a negative interest to do so, but they can finance the purchase by borrowing Danish krone -- which are currently yielding even less (i.e. more negative), which in turn results in a positive carry trade.
How much longer will this situation continue? Personally, I believe we're coming to the end of the bond bubble, but I wouldn't short just yet -- as the last leg can be the most explosive. Eventually, though, an enormous amount of capital may exit government bonds, which may have the effect of bidding up everything else: commodities, gold, equities, etc.
What do you think?