Issue of the week: accentuating the negative
The strange “sub-zero” bond market has become a focus of anxieties about the global economy
This is fast turning into “a summer of fear” as far as markets are concerned, said Rana Foroohar in the FT. Last week’s volatility was ostensibly triggered by the US-China trade conflict. But the underlying concern among traders is that “the global downturn has begun”. They aren’t convinced by the US Federal Reserve’s claim that its July rate cut was “merely insurance” against some “future downturn”. For evidence, one might point to weak purchasing managers’ indexes in the US and larger European economies, the rise in corporate bankruptcies, or the recent spike in US lay-offs. But plenty of “worried market participants” are looking most closely at the state of sovereign bond markets, and the now “$14trn horde of negative-yielding bonds around the world”. Safe government debt has long been a haven for investors in times of trouble. But when this many investors “are willing to pay for the ‘security’ of losing only a little bit of money, as a hedge against losing quite a lot, you know there’s something deeply wrong in the world”.
The current “bond-yield plunge” is certainly “hard to ignore”, said The Wall Street Journal. “The latest flare-up in trade tensions” has prompted a wave of selling in stock markets, helping to push bond yields (which move inversely to prices) down to their lowest levels in years. Most significantly for the doomsters, the “yield curve” (i.e. the difference between what it costs the US government to borrow money over ten years and over two years) has “inverted” again, said John Stepek on MoneyWeek. com. That “almost always signals a recession, although perhaps not for up to two years”. Rates are extremely low in other countries too, said Allison Schrager on Quartz: “the entire German bond curve is in negative territory”. Historically, economists have assumed bond yields will always “revert to the mean” – but the current situation gives the lie to that. In fact, the European Central Bank is shortly expected to lower rates deeper into negative territory.
Negative interest rates were first dreamt up in 1890 by Silvio Gesell, “a colourful German businessman” who was once the “People’s Representative for Finance in the Soviet Republic of Bavaria”, said the FT. In recent years, they’ve been championed by some central banks, notably Sweden’s Riksbank, to stimulate growth after the financial crisis. Riksbank argues “the policy has borne fruit” – but some claim exiting it is “harder than expected”. The old theory that “zero would act as a floor for interest rates has been shattered”. Roughly one-quarter of the global debt market is now “trading at levels once thought improbable”. No one knows what that will eventually mean for stability.