Here’s a chart from an article on Bloomberg today illustrating the yield curves of Japanese and German government bonds (the article is worth reading). You have to lend money for 9 years to Germany and more than 13 years to Japan if you want to earn a positive yield to maturity! Some 29% of developed-nation government bonds (over $7 trillion worth) are now trading at negative yields. This highlights why US government bonds still look attractive at 1.9% on the US 10-year treasury bond. We also have the European Central Bank concluding a meeting tomorrow and the Bank of Japan on Monday with the possibility that either takes deposit rates even further into negative territory. While some of this is due to investors speculating that they can earn a “guaranteed” gain through price appreciation having a committed buyer (the Central Bank) to sell to, the only reason yields would be anywhere close to zero, much less negative, is the fear of deflation. What matters in investing is your “real” return, which is your return after inflation. If inflation is -3% (falling prices) than a -1% yield on your bond is actually a real return of positive 2%. Interesting times we live in…
Nick