Bonds Pay Less Than Zero As Investors Flee To Safety

Benchmark German 10-year bund yields were trading lower by 4 basis points to negative 0.02 percent as of 11:54 a.m. London time after touching negative 0.033 percent – the lowest level since Bloomberg began tracking the data in 1989.

Government bond yields have been in decline throughout the industrialised world as investors seek to stash cash in safe havens.

Investors have also been attracted towards fixed income assets as a result of escalating bond buying policies from the Bank of Japan and the European Central Bank.

For investors, the bund’s move below zero highlights an investment world of increasingly low returns.

So German 10-year bonds were down to 0.02 per cent – within a whisker of zero.

Standard Life Investments Ltd., the biggest money manager in Edinburgh, has a relatively long European position versus the USA within its bond portfolio, though it expects most of the gains to come from higher-yielding sovereign bonds.

The yield fell to minus 0.001% when European markets opened after closing at 0.02% on Monday, and fell to as low as -0.004% in early trading.

As the market seems to believe that a July rate hike is also off the table, analysts will be looking for hints in the Fed’s policy statement, expected Wednesday, regarding “how policy makers are shaping their reactions to global developments”, said Aaron Kohli, interest-rate strategist at BMO Capital Markets.

“We have some countries – the most notable ones are in Europe – where the investors are willing to buy bonds that have a negative yield”. So far the drop in yield isn’t showing signs that it will ignite a reversal similar to what happened in April past year, when the previous record was followed by a selloff that pushed yields up by a full percentage point in less than two months. The pan-European FTSEurofirst 300 index closed down 1.89 percent at 1,260.14, a three-month low.

“Nevertheless, the abrupt slowing in employment and falling long-run inflation expectations should raise alarm bells, and risk management concerns suggest delaying action until after the outcome of the United Kingdom referendum”, they said. Last week, German lender Commerzbank AG estimated that nearly two-thirds of outstanding German sovereign debt now yields below minus 0.4%.

Polling for weeks has placed the Leave campaign ahead of the Remain side with the British referendum now little more than a week away.

German bonds with a maturity out to nine years have a yield below zero and the average yield of German bonds in circulation turned negative for the first time this week. It is part of a historical rally in the price of bonds as investors worldwide flee from risk and into the safety of government debt.

The head of the German central bank, Jens Weidmann, has sounded a warning about a rising risk of a reversal and “large jumps in risk premiums” as large investment funds shift money in and out of bonds depending the outlook for central banks changing interest rates.

Globally, Fitch Ratings estimates sovereign bonds worth $10.4 trillion have negative yields, out of an estimated global total of $60 trillion.