Investing in government debt used to be a boring, pretty straightforward proposition. You buy a bond. Then you get back interest payment. So easy, even your great uncle Mort can do it.
These days, things aren’t so straightforward: The sovereign-debt markets have devolved into a bizarro world of upside-down expectations. Yields on government bonds from all around the world have been plunging thanks to anxious investors buying them for their safety. (Bond yields fall as prices rise.) And in many instances, the returns have cratered below zero. As Quartz reports Thursday, “around a third of all developed-country government debt—or more than $7 trillion, in terms of market value—is now trading at negative yields,” meaning that buyers are willing to pay more for these bonds than they will eventually get back if they hold them to maturity. This is remarkable. Countries like Germany have been selling short- and midterm debt at negative yields for a while, but now it’s happening with bonds dated for 10 years or longer. Investors are basically banging down the door for the guarantee that they will only lose a little bit of money over the next decade or two.
The most mind-blowing example of this trend is Switzerland. Last week, yields on all of its government bonds, out to 50 years, turned negative. Investors are now expected to pay for the privilege of lending money to the Swiss for a half-century at a time. Other countries are getting nearly as good deals. Fifteen-year German and Japanese bond yields have also drifted below zero. Even economically wounded Spain can borrow for a few years at a time and theoretically make a profit. It’s like a bad financial-world play on a Yakov Smirnoff joke: In Switzerland, lender pay you!
Why are investors settling for these kinds of terms? For one, they don’t see many other safe options. The world economy still feels shaky, especially after the Brexit vote, which sent bond yields even lower. Meanwhile, stashing cash in a vault somewhere costs money and effort—you need to cover the cost of security and storage. So they’re willing to pay governments to essentially hold their euros or yen or Swiss francs. The fact that long-dated bonds are going negative also means that the markets don’t expect inflation to rise much down the line, which means they don’t expect world growth to pick up much either. It may even be a sign that some investors see deflation on the horizon, since a bond with a negative yield could theoretically be profitable if prices fall enough in a country.
All of which is to say: Today’s sub-zero bond yields are a sign of how deeply pessimistic investors have become about both the near and somewhat distant future. And if they stay down, they could create some nasty problems of their own. When long-term interest rates fall too low, for instance, it makes it very hard for banks to earn a profit by borrowing and lending. This is playing out all over, but right now, people are looking very nervously at Italy’s banks in particular, which are parched for profits while sitting on a pile of bad loans. As Matt O’Brien notes at the Washington Post, low bond yields around the world can make it hard for central banks to ever raise rates, since the second they do, investors will rush to buy that government’s bonds. Among other things, that can push up the value of a currency, hurting exports and risking deflation.
Of course, low bond yields have an upside: Right now, governments can borrow for cheap. Many, like Switzerland and Germany, can even make money at it! There are all sorts of things they could do with those funds—sit on them and watch the interest pile up, start a sovereign wealth fund, launch some crazily ambitious public works project in an attempt to stimulate their economies, start rocketing space vessels full of bonobos to mars. The point is that markets are begging to lend. And if enough countries borrow to spend, that might actually pull the world economy out of the funk that drove rates down below zero in the first place.
