Earlier last week, on the heels of the ECB’s “hint” that it would start easing again (or even more), an additional $714 billion of bonds achieved negative yields, sending the global total to a new record. It may be hard to believe, but around the world (mostly in Europe and Japan), roughly $12.5 trillion of debt has a negative yield and the total appears to grow every day.
Source: Bloomberg as of June 19, 2019
An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.
Against the backdrop of a slowing European economy, for the first time ever this week French and Swedish 10-year bonds joined German Bunds in the “below zero” club as investors sought safety from potential future defaults. As we have learned, even the bonds of some well-known European companies like LVMH and Sanofi have negative yields.
What? Could it be that there are investors willing to pay for someone else to take their money? Yep. We believe an unintended, yet not totally unexpected outcome of continued monetary policy stimulus and a lack of adequate fiscal policy response worldwide. Recently, in our opinion, global trade wars, Brexit and political turmoil across the globe have exacerbated this already perverse reality – typically, negative rates should not persist in a global economy that is still expanding.
We think distorted rates around the world makes managing monetary policy in the US even more difficult for the Fed. Generally, as capital flows into higher yielding US bonds based upon relative value, US yields are dragged lower, leaving the Fed no choice but to acquiesce to the bond market’s message and cut rates despite a generally positive and stable economic backdrop. If yields are this low when economic conditions are favorable (albeit decelerating) what happens when we face the inevitable recession? We believe it could get very ugly as central banks around the world struggle to stave off cataclysmic outcomes with increasingly feckless monetary tools. We think this is a major reason gold has rallied in recent weeks – up over 6% in June alone. In our view, gold remains one of the few assets that won’t be debased by ill-conceived monetary schemes and has the potential to continue to rally as long as these conditions persist.
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The views presented herein are those of Validus Growth Investors, LLC and are provided for informational purposes only. The information is current as of June 2019 and is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus Growth Investors, LLC or any other investment professional.
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