As part of its €1.1 trillion quantitative easing plan, the European Central Bank (ECB) will buy government bonds due between two- and 30-years, including those with negative yields, President Mario Draghi said in January. The bond buying plan has left $1.9 trillion of the euro region’s government securities with negative yields.
Germany sold five-year notes at an average yield of minus 0.08 percent on February 25, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020. By the next day, German notes with maturity out to seven years had sub-zero yields — reached minus 0.017 percent. The rates on seven other euro-area nations’ debt were also negative.
The German bond markets are leading this historical phenomenon — 88 of the 346 securities in the Bloomberg Euro zone Sovereign Bond Index have negative yields. Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index.
The seemingly illogical willingness of investors to pay issuers to borrow their money is neither irrational nor driven by just noncommercial considerations (such as regulatory requirements or forced risk aversion). As the ECB prepares to start its own large-scale purchasing program next week, some investors believe they could make capital gains on such negative yielding investments.
The ultra-low interest rate regime is likely to persist for now and this has caused challenges for banks. A growing number of European banks are now charging depositors for holding their funds.
Mohamed El-Erian commented that there are few analytical models, and even fewer historical examples, to help understand the broader economic, financial, political and social implications of all this — particularly for a global financial system based on the assumption of positive nominal rates. We are truly in unchartered waters. Accentuated by the illusion of market liquidity, this is a world in which small adjustments in probabilities of future outcomes — if and when they occur — could result in sharp movements in asset prices.
El-Erian, Mohamed (2015): “10 Things to Know About Negative Bond Yields”, Bloomberg View, February 27.
Goodman, David and Lukanyo Mnayanda (2015): “Germany’s Negative-Yield Universe Extends as ECB Prepares to Buy”, Bloomberg Business, February 26.
Goodman, David and Lukanyo Mnayanda (2015): “Euro-Area Negative-Yield Bond Universe Expands to $1.9 Trillion”, Bloomberg Business, February 28.