Making A Positive Out Of Negative Yields

Making a list of central banks triggering quantitative easing programs this year is not an easy task.

The big guns, like The Federal Reserve and Bank of England have long pumped cash into their once ailing economies.

A few weeks ago, the European Central Bank jumped on the bus which most investors thought had long departed.

But the extent of QE goes much farther – with another 20 central banks actively pursuing programs at the moment.

The result is an unpredictable world of sudden rates cuts and rises, decoupling of currencies and volatile foreign exchange rates as currencies rise and dip against each other.

Unconventional policies

Investors would like to make sense of this chaos, but unconventional monetary policies are the norm rather than the exception, and lack of certainty leads to risk and volatility.

The key to what’s happening is deflation. Central banks are worried about prices falling, economies stagnating and their currencies losing parity with their rivals.

These are uncharted waters for the global economy. Some countries have experienced prolonged deflation and lack of growth – such as Japan over the past decade or so – but never have so many faced the same problems at the same time.

The result is not just low interest rates, but negative saving rates and bond yields.

QE sucks the life out of markets for savers, leading to miserly returns.

Government bonds recently sold in Germany, Finland and Austria are all offering negative five-year yields.

These three countries do not stand alone. Plenty of other bonds are offering negative, zero or paltry yields to investors – along with many big-name corporate bonds.

So what’s the attraction for investors?

Zero growth

Certainly not income or growth because they provide nothing but a guaranteed loss.

Reasons vary between investors –

  • A poor view of the economic outlook means some are seeking downside protection
  • A negative yield can still be positive if inflation winds blow right
  • Hedging against currency turns is another dangerous game

For institutional investors, tightening financial regulation means they have no choice but to scoop up a certain amount of negative value assets because the rules say they can only hold a certain level of liquid investments.

Eurozone QE is not helping, by buying up the assets; the program is devaluing these bonds even more.

The only certainty in this uncertain world for investors is that circumstances are changing fast but at different rates for different economies.

The global market is fragmenting into nations progressing at different speeds and it’s easy to be caught flat-footed by sudden, unexpected movements.

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