The Environment of Negative Yields

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Even if you still find people out there looking for short term products with attractive yields and a capital guarantee at best, every investors should be aware of the current market. Especially the yield environment makes it tricky to find appealing returns in products that make sense. Most of the time the risk you have to take to earn a yield assessed as attractive is disproportional. „Good“ investments are not an obvious thing these days.

Central banks are controlling the (financial) game nowadays around the globe, no matter if is fixed incomes, equities and even commodities or real estate. Therefore it is no wonder that investors are literally hanging on every word of the Central banks’ decision makers. The ECB’s start of it’s own „monetary easing rocket“ last week was just another link in the chain leading to some waves even outside of Europe.

JP Morgan made an interesting remark on the markets last week mirroring the situation of the fixed income markets and the dilemma of many investors. USD 1.7 trillions of Euro area government bonds of greater than one year maturity were trading with a negative nominal yield after the ECB’s decision. If you add Swedish, Swiss and Danish government bonds to this it sums up to USD 1.8 trillions. A similar sum of Japanese government bonds also traded in negative territory last week, so that USD 3.6 trillions of global government bonds traded with yields below zero last week. According to JP Morgan this equals 16% of its Global Government Bond Index. So nearly a fifth of all global government bonds were trading with a yield below zero – a remarkable fact for sure! And even if Japanese yields recovered, so that positive territory in most of them was reached, there is still a bunch of government bonds out there, costing investors money if they decide to buy them.

So would a rationally thinking investor buy a bond with a negative yield? Not really, or would he? Well, even if it may seem counterintuitive, but there are certain reasons buy bonds even with a negative yield. If you for example are living in a deflationary environment or expect deflation it can make sense to even accept negative yields – as long as expected deflation would make real yields positive. Buying government bonds with negative yields can also be a way to speculate on a currency appreciation. If you expect capital gains from further rate cuts or quantitive easing measures, even such a bond would be interesting cause the yield could fall further causing rising bond prices. Of course central banks itself are buyers of those bonds in the course of QE programs and index funds have no other choice than to buy those bonds. So you see, in certain occasions it makes sense to buy those bonds and for certain investors the negative yield is therefore not an issue – at least not a big one.

But even if there are reasons to buy those bonds, this does not make the environment easier for investors. Cause a plain vanilla bond investor who goes for maturity would seldom accept a negative yields on a bond. He simply would not accept having to buy more for an investment than he receives out of it.

Financial engineering like INNOVATIS uses it to create and structure products allows to design products with an optimal payout profile. Nevertheless it is not a way to squeeze more yield out of a market, than it offers. INNOVATIS is known to find the best possible product solution for its investors according to their needs. Nevertheless, what we can’t do is to perform magic on markets or yields. Anyway, even the current markets offer opportunities where we can offer decent yields in combination with moderate risk. If you need more information on our solutions don’t hesitate to contact us.