A week ago many were surprised to learn that in his attempt to “fight deflation”, the ECB’s Mario Draghi unleashed the biggest deflationary wave of all time, when in the aftermath of the ECB’s NIRP policy, and subsequently QE, an unprecedented €1.4 trillion in European debt with a maturity of more than 1 year traded down to subzero, as in negative, yields.
But what happens if one expands the Eurozone NIRP universe to include the debt of other countries including Japan, Denmark, Sweden, Switzerland and so on? Conveniently, JPM has done the analysis and finds that a mindblowing $3.6 trillion of government debt traded with a negative yield as recently as last week. This represents 16% of the JPM Global Government Bond Index, or in other words nearly a fifth of all global government debt is now trading with a negative yield, meaning investors pay sovereigns, using other people’s money of course, for the privilege of buying their issuance!
JPM’s full take:
There is currently €1.5tr or $1.7tr of Euro area government bonds of greater than one year maturity trading with negative nominal yields, almost all of them of core euro governments of up to 5 years maturity. This figure rises to $1.8tr if one adds $16bn of Swedish, $60bn of Swiss and $45bn of Danish government bonds currently trading with a negative yield. Almost all Japanese government bonds are trading with positive yields this week, but last week around $1.8tr of them were trading with a negative yield. So the total universe of government bonds traded with a negative yield was $3.6tr last week or 16% of the JPM Global Government Bond Index.
The logical follow up question: as the entire world appears slowly but surely headed to a uniform NIRP platform, where every single sovereign’s debt will have a negative yield thanks to one or more central banks’ guarantees that said debt will be monetized no matter what (those curious what happens when there is even a faint doubt if a given nation’s Treasurys won’t be backstopped and purchased by a central bank, just look at what happened to Greek bonds this past week), why do investors keep dumping their cash in securities that have a negative carry?
Here again courtesy of JPM’s Nikolaos Panigirtzoglou, are six investor classes which, even with US stocks trading at the low, low forward GAAP PE of a modest 20x, prefer to incentivise governments around the globe to issue even “moar” debt, in the process making a global debt crisis that much worse, as the stock of government debt rises to truly catastrophic proportions.
Investors who fear or expect deflation tend to find nominal bonds with even negative yields attractive as long as expected deflation makes real yields positive. In a deflationary environment investors tend to shift away from real into nominal assets. During the previous two decades in Japan, this took the form of a shift away from equities and real estate into cash and nominal JGBs. Investors who speculate on currency appreciation, for example investors buying Swiss or Danish government bonds to speculate on CHF or DKK currency appreciation. Investors who expect capital gains from central bank easing i.e. rate cuts or QE. For example, investors who have been buying euro area bonds over the past six