The rise of negative bonds yields starts with how central banks set interest rates, according to the recent study from Quay Global Investors “Investment Perspectives” which looks at whether bonds are in a bubble and the shift from monetary policy to fiscal policy.
“Holding a negative yielding bond to maturity means certain economic loss. The only potential gain is to on-sell the bond for an even lower yield (i.e. finding a greater fool) before maturity, passing the certain loss to the buyer. This is not a bad definition of a bubble,” Chris Bedingfield, principal and portfolio manager at Quay Global Investors, said.
“However, we believe the rise of negative bonds yields is more complex. It begins with how central banks set interest rates.”
He went on to explain that while central banks controlled the cash rate directly, their actions and price-signalling indirectly controlled long-term rates.
But it did not mean that sovereign bond yields were in a bubble, he said.
“That doesn’t mean buyers of negative-yielding bonds will not lose money. They certainly will, if held to maturity. However, if expectations are correct, they will lose the same amount of money as if they were holding cash over the same timeframe. Choose your poison: a certain loss (bonds) or an uncertain loss (cash),” he said.
At the same time, the 2017 Trump tax cuts changed everything as it created a very different scenario, given that there was no...