Bond in­vestors in Europe and Ja­pan are los­ing money to save it

▶ In­vestors in Europe and Ja­pan are pay­ing up for safety ▶ “At the mo­ment there seem to be few al­ter­na­tives”

Bloomberg Businessweek (North America) - - Contents -

It’s not as if Christoph Kind rel­ishes putting his clients’ money into bonds that pay noth­ing in in­ter­est and can all but guar­an­tee losses. But Kind, the head of al­lo­ca­tion at Frank­furtTrust As­set Man­age­ment in Ger­many, is do­ing just that. And he’s hardly the only one.

In Europe and Ja­pan, cen­tral banks have set some rates below zero— an idea that’s hard to get one’s head around. But neg­a­tive yields for bond in­vestors have al­ready be­come an ev­ery­day re­al­ity.

Yields fall when bond prices rise. They go neg­a­tive when the price is higher than all fu­ture in­ter­est and prin­ci­pal pay­ments. In Ger­many, surg­ing de­mand for two-year govern­ment debt has pushed yields to -0.53 per­cent per year, mean­ing an in­vest­ment of €10,000 would pay back only €9,894. The av­er­age yield on all €1.1 tril­lion ($1.2 tril­lion) in Ger­man bonds was sub-zero ev­ery day for more than two weeks as of Feb. 23. That’s the long­est stretch of money-los­ing rates ever, ac­cord­ing to Bank of Amer­ica. In Ja­pan, bond prices are so high that al­most two-thirds of govern­ment debt, amount­ing to $4.5 tril­lion, has a neg­a­tive yield, ac­cord­ing to data com­piled by Bloomberg.

Be­hind the low rates are fear and grow­ing skep­ti­cism that cen­tral banks’ dra­matic rate cuts will be enough to reignite the global econ­omy. Wor­ries over the eco­nomic health of China and the U.S., plus volatil­ity in stocks and oil prices, have many in­vestors look­ing for safe as­sets. Even with slightly neg­a­tive yields, the bonds is­sued by Ger­many and Ja­pan at least of­fer liq­uid­ity and the as­sur­ance that they won’t de­fault.

“Risk-free now has a cost,” and clients are learn­ing that they should ac­cept it, says Mauro Vit­tor­angeli, a se­nior fixed-in­come money man­ager at Al­lianz Global In­vestors, which over­sees about $505 bil­lion in as­sets.

The low rates also sug­gest mar­kets see lit­tle risk of a spike in in­fla­tion, which would make hold­ing neg­a­tive-yield­ing bonds even more painful— and likely prompt cen­tral banks to raise rates and thus make ex­ist­ing bonds less valu­able. (Even govern­ment bonds that won’t de­fault can lose mar­ket value be­fore they ma­ture if rates rise.) A ma­jor­ity of econ­o­mists in a Bloomberg sur­vey say neg­a­tive rates will be in place at the Euro­pean Cen­tral Bank at least un­til the first

quar­ter of 2018, and at

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