National treasury bonds are the safe option in times of global turmoil, and the more uncertain things are, the more people buy them, and the higher their prices go.
So far, so normal: many countries’ national bonds have had “negative yields” in the post-crisis era, meaning that the governments issuing the bonds will pay you less back at the end of the bond’s life than you paid for them. That is, you have to pay for the privilege of loaning the government money, and receiving the guarantee that you’ll only lose a little in the bargain.
But those bonds were all short-term, reflecting a consensus that things would have to get better soon — all the financial engineering and so forth would put us back on an even footing, so governments were just offering a safe place to park your dough for a little while until the storm passed.
Last week, Switzerland announced that all of its bonds would pay negative yields, even the 50-year ones. That means that Swiss authorities have taken the market’s temperature and concluded that there’s a lot of money to be earned in betting that things will only get worse for the next half-century.
Buying negative-yield 50-year bonds is also a bet against inflation — which is to say, growth — because even modest inflation would be a disaster for 50-year holdings paying negative yields. Even a little inflation will make these bonds into a way to lose money in slow motion.
The only way a 50-year negative-yield bond makes any sense is if you believe in deflation, the disease most dreaded by economists, considered even scarier than runaway, Weimar/Zimbabwe/Yugoslavian hyperinflation. Deflation is what happens when prices start dropping, which prompts buyers to hold onto their money (because the longer you hold onto it, the more it will be worth), which prompts sellers to slash their prices further, which makes buyers even more reluctant to spend… You get the picture.
There have been persistent deflation worries since oil prices started falling in 2015. Now there’s the risk of housing price deflation, too, as London’s housing bubble starts to burst, and the Chinese speculators who drove the market by trying to smuggle their cash outside of China’s own slow-motion economic implosion begin to run out of cash (though there’ll always be a general with literal tons of cash to hide).
Add to that China’s slashing of the Renminbi to prop up their UK exports as the pound plummets, and deflation starts to seem like more of a risk, which may explain these Swiss bonds. Or maybe it’s just PT Barnum’s law, with Swiss characteristics.
All of which is to say: Today’s sub-zero bond yields are a sign of how deeply pessimistic investors have become about both the near and somewhat distant future. And if they stay down, they could create some nasty problems of their own. When long-term interest rates fall too low, for instance, it makes it very hard for banks to earn a profit by borrowing and lending. This is playing out all over, but right now, people are looking very nervously at Italy’s banks in particular, which are parched for profits while sitting on a pile of bad loans. As Matt O’Brien notes at the Washington Post, low bond yields around the world can make it hard for central banks to ever raise rates, since the second they do, investors will rush to buy that government’s bonds. Among other things, that can push up the value of a currency, hurting exports and risking deflation.Of course, low bond yields have an upside: Right now, governments can borrow for cheap. Many, like Switzerland and Germany, can even make money at it! There are all sorts of things they could do with those funds—sit on them and watch the interest pile up, start a sovereign wealth fund, launch some crazily ambitious public works project in an attempt to stimulate their economies, start rocketing space vessels full of bonobos to mars. The point is that markets are begging to lend. And if enough countries borrow to spend, that might actually pull the world economy out of the funk that drove rates down below zero in the first place.
Something Crazy Is Happening to Swiss Bonds, and It’s a Sad Sign for the World Economy
[Jordan Weissmann/Slate]