Bond yields across much of the developed world have tumbled below zero as prices have climbed ever higher (prices move inversely to yields). This implies that investors buying the bond now and holding it to maturity will make a loss. In effect, they are paying a government to look after their money.
Yields on US government bonds remain positive, but many short-duration European bonds have negative yields (short duration means they are maturing soon). Germany’s five-year note offers a sub-zero rate, while the ten-year Bund is at a record low, yielding around 0.3%. Switzerland’s ten-year yield is marginally negative. Japan’s average yield across all maturities is a mere 0.3%.
So what’s going on? Fear and uncertainty play a part: with a possible euro-area break-up looming and the global recovery still far from convincing, some investors don’t mind losing a little in order to avoid losing a lot, says Buttonwood in The Economist. But this doesn’t explain the negative yields on longer-dated bonds. “You’d have to be quite depressed” to assume an asset wouldn’t make money over a decade. Investors may be factoring in long-term deflation, which could imply a positive yield in real terms, or buying bonds to bet on currency trends.
But the likeliest explanation is anticipation of quantitative easing in Europe. “Why worry about the theoretical loss involved” if you know you can off-load the bond to your “friendly neighbourhood central bank”? And so the three-decade-long bond bull market charges onward into an ever-more spectacular bubble.