"Outright Insanity" on Display in the Global Bond Market

Find out about these "contracts of confiscation"

by Bob Stokes
Updated: March 07, 2019

Driving through a community, it's common to see banks or credit unions advertising the interest you will earn on a checking or savings account.

Yet, can you imagine a billboard that says, "Be our customer and we will charge you for lending us some of your hard-earned money"?

Right, that would seem to be an absolutely insane way of trying to attract customers.

But, crazy or not, demand for negative-yielding bonds has been surging.

You might wonder why anyone in their right mind would buy such a bond.

Well, the chief investment officer of a big financial firm provided this simple explanation (CNBC, Sept. 2016):

"The only reason you buy negative-rate bonds is if you think it's going to go more negative."

In other words, if an investor buys a negative-yielding bond, and the yield subsequently drops further, the price of the bond rises and can then be sold at a profit.

But, our March Global Market Perspective says that the demand for negative-yielding bonds is one of the signs that global financial conditions are more perilous than at any other time in history. The publication showed this chart and said:


The demand for negative-yield bonds is a phenomenon that many prior generations of investors would take for outright insanity. These bonds are really contracts of confiscation, as investors who buy these bonds at par are guaranteed to lose money if they hold to maturity. Properly functioning economies and debt markets do not have negative-yield bonds.... Since last October, the total is again expanding fast.

Almost all negative-yielding debt comes from Europe and Japan.

As EWI has noted, negative bond yields reflect the intensifying deflationary pressures of a global economic stagnation that will eventually morph into an outright contraction.

Indeed, our analysts already see signs of contraction in some major global economies.

Learn about these signs in the March Global Market Perspective, which you can access for 30 days without any obligation. Get the details below.

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