The bubble that negative rates blew

There are $9 trillion worth of government bonds with negative yields on this planet of ours. In Japan, all debt with a maturity of 15 years or less currently has a negative yield. Investors chasing a measly yield of 0.39% have to be willing to loan money to the Japanese government for 50 years.

You might be perfectly willing to do that, especially in the absence of any other “safe” investments. But it’s not a riskless position. First you have to worry about rising rates. Because bond prices and rates move in opposite directions, any sudden rise in interest rates will send bond prices down.

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Then you have the risk of defaults. Granted, countries with a printing press can theoretically crank it up and pay back all their obligations with new money. This, I think, is the point Donald Trump has made about US debt. You needn’t technically default if you own a printing press.

But firing up the printing press to pay your way out of debt with funny money does something not funny: it destroys the currency. You turn a debt crisis into a currency crisis. And when money dies, to paraphrase Adam Ferguson, a currency crisis becomes a crisis for civilisation. That’s what we mean when we talk about Weimar Germany, the destruction of a civilisation through a debt and currency crisis.

How much bigger can the bond bubble get? Well, Spain joined France and Belgium in issuing 50-year bonds. It’s perverse, but governments can lock in very low rates for a very long maturity in this environment. That’s an incentive to create more debt, not less. That’s a horror show coming to a country near you.

Category: Market updates

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