Negative yield bonds disappear, signalling end of easy money era

One of the biggest signals that the economic environment has radically changed happened in the past week with the last of the bonds carrying negative yields quietly disappearing.

What this shows definitively is that the easy money and central bank stimulus days from the post-GFC and pandemic era has really left for the long term – it is now an interesting historical footnote but no longer something that should be taken into account when deciding where to put your money.

At its peak there was an amazing $26 billion of bonds that literally didn’t make sense in a conventional way – with negative yields those who invested in them were actually locking in a loss at maturity and would get back less money than they put in.

That represented an incredible quarter of all government bonds on issue, according to Bloomberg estimates.

Two negatives make a positive?

However, in the perverse logic of money printing and central bank bond buying, these negative yield bonds made some sort of sense because central banks in Japan and Europe were buying them back anyway and you might make a capital gain.

Now with the Japanese central bank finally loosening its hold on the bond market, the last of the negative yield bonds have disappeared and the global bond market has resumed a much more logical look in which government bonds will deliver a return if held to maturity.

One of the first to spot the departure of the negative yield bonds, Deutsche Bank head of thematic research Jim Reid said that before 2014 “most people would have thought negative-yielding debt was an inconceivable concept”.

Central banks got desperate for growth

That changed a while after the Global Financial Crisis (GFC) when central banks drew desperate in their efforts to nudge some growth and inflation into their sluggish economies and started to adopt a range of pump priming, bond buying, money printing strategies that eventually pushed some bond yields negative.

That meant investors were effectively paying for the privilege of financing government debt.

Negative yields spread from the Eurozone and Japan to a range of other countries, including Switzerland, Denmark and Sweden.

Bond prices now tumbling

The unwinding of the negative bonds is not the end of the damage though – bond prices have continued to tumble after a massive bull market that lasted for decades as official interest rates fell steadily all the way to zero and beyond.

Now bonds are in a nasty bear market which could last a while as interest rates keep rising, chasing inflation higher.

Hopefully the days of negative yielding bonds won’t return for a long time, although some bearish commentators who are predicting steep recessions in the wake of rising interest rates think the bad old days of central bank bond buying could come back sooner than we think.

The best chance of that not happening would be a fall in inflation and more robust economic growth than expected but the abiding lesson from the era of negative bond yields is that they are no panacea for economic ills.

Rather, they were a symptom of deep imbalances in the world economy and a signal that central banks had reached the end of their effectiveness and it was time for national governments to step up to the plate to stimulate growth through more appropriate fiscal policies.