If you were amazed by the oil price collapse, consider something more astonishing: negative bond yields. Trillions of euros of sovereign debt is now paying a negative interest rate. In other words, investors are paying for the privilege of lending money to the government, and it is not just in the world of sovereign issues that credit has gone topsy turvy; the yield on some corporate debt has fallen into negative territory.
According to Reuters, euro-denominated bonds issued by EDF, Royal Dutch Shell and Nestlé are all trading with an offer yield below zero while a whole swathe of Swiss franc issues are trading with yields under water.
So far, it is only sovereigns that have attempted to sell debt with a negative coupon, forcing investors to pay for the right to park their money within the safe haven of a state treasury. In September, the German Finance Agency sold €3.3-billion ($4.7-billion) of notes with an average yield of minus-0.07 per cent but some analysts reckon it is only a matter of time before some blue-chip corporates take advantage of the power of their credit ratings by issuing debt with a negative interest rate.
It's a neat trick for the likes of Nestlé or Shell to make money by borrowing but the rationale for an investor to oblige seems perverse. The European Central Bank is the big actor in this drama, killing borrowing rates with its program of bond-buying or quantitative easing. In response and to prevent a surge of flight capital from boosting the value of their own currencies, several monetary authorities, including Switzerland, Denmark and Sweden have been cutting borrowing rates. Last week, Sweden's Riksbank became the first central bank to set a negative main policy interest rate, announcing that it would set its repo rate at minus-0.1 per cent.
But the negative-yield medicine is not working. The Swiss franc soared against the euro and flight capital is still chasing T-bills and Swiss franc-denominated bonds. Some investors, it seems, would rather suffer a small capital loss, parking their cash in a blue-chip European corporate bond with a negative yield to maturity than endure the bigger risk of a deposit in a less solvent Italian or Greek bank. For central bank governors and treasury policy makers, the dilemma remains acute. For economies to thrive, money must circulate and businesses must have access to the capital they need to expand. Meanwhile, managers of pension funds face a mounting problem. Traditionally, sovereign debt and blue-chip corporate bonds are the mainstay of a safe pension portfolio but how do you match pension liabilities with bonds yielding nil or even negative interest? There is no easy way to stop owners of capital from parking their cash in sub-zero yielding bonds and deposits. Where there is fear, capital will always take flight to safe havens.
The optimistic see the nil and negative interest rates as temporary, a distortion that will quickly disappear when short-term investor fear reverts to habitual greed. Soon, the world will regain its affection for equities that generate returns from both dividend and capital growth, goes the argument. In other words, zero yields are a fad, a bit like the dot-com boom, when investors bid up the price of businesses with no income or tangible prospect of return.
Yet, this seems different, not least because the buyers of negative or zero-yield debt are being ultra-cautious, not reckless. The world is awash with spare capital but at the same time there is a perception of a famine of investment opportunities. The widespread assumption that negative interest rates will send investors scurrying back toward risk may be the Pollyannaish view of central bank technocrats, rather than the investors currently sitting on their hands.
It may be that in large parts of the developed world where populations are aging, economies will continue to move in very low gear with low levels of growth, below 1 per cent. Interest rates will remain close to zero and governments will wrestle with measures to get idle capital moving. Consider last summer's oil collapse, which many believed would be temporary with a quick bounce back to triple-digit prices. We now know that demand is still weak and there is a lot of oil about. Around the world, a lot of cash is also looking for a job to do but investors still don't see the right opportunities.
Carl Mortished