Bid/Ask: The Lon­don Stock Ex­change and Deutsche Börse talk tieup; Ver­i­zon gets 20,000 miles of fiber op­tics

Bloomberg Businessweek (Europe) - - CONTENTS - −Lukanyo Mnyanda and Eshe Nelson

the Bank of Ja­pan even longer.

“This is quite a tricky sit­u­a­tion,” says Frank­furt-Trust’s Kind. He wor­ries that with bond prices so high, in­vestors are vul­ner­a­ble to a sell­off if the con­sen­sus on fu­ture rates and in­fla­tion proves wrong. Still, Kind has bought neg­a­tive-yield­ing bonds in re­cent weeks. “It’s tough at th­ese lev­els, but at the mo­ment there seem to be few al­ter­na­tives,” he says.

Con­sider the case of U.S. Trea­suries. David Ric, head of ab­so­lute-re­turn fixed-in­come strate­gies at the as­set man­ager Amundi, calls them “the least ugly duck out there.” Fed­eral Re­serve Chair Janet Yellen bucked the trend among cen­tral banks by rais­ing short-term rates in De­cem­ber by 0.25 per­cent­age points from nearzero. Even so, 10-year U.S. debt yields only 1.7 per­cent, down about half a per­cent­age point since the start of the year. That’s much bet­ter than the 0.14 per­cent in­vestors are get­ting for 10-year Ger­man bonds—un­til cur­rency ex­change is fac­tored in. Trea­suries gained about 1.1 per­cent in Fe­bru­ary, but Euro­peans hold­ing them lost 0.77 per­cent in euros as the value of the dol­lar fell. It’s pos­si­ble to use hedg­ing con­tracts to elim­i­nate such cur­rency risk, but the cost of do­ing so re­sults in a re­turn that’s no bet­ter for Euro­peans than buy­ing Ger­man bonds.

Ja­panese in­vestors face a sim­i­lar lack of op­tions. Fac­tor­ing in as­sump­tions about fu­ture in­ter­est rates and for­eign ex­change, a Bloomberg anal­y­sis shows that 10-year U.S. Trea­suries are likely to yield -0.7 per­cent in yen. For now, that leaves Euro­pean and Ja­panese in­vestors fac­ing the prospect of los­ing money in or­der to save it. Says Al­lianz’s Vit­tor­angeli: “We are in a to­tally new world.”

The bot­tom line In­vestors are will­ing to pay so much for some govern­ment bonds that they are lock­ing in a neg­a­tive re­turn.

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