Why Yields in Europe Turned Negative



The last year has seen a proliferation of bonds trading with a negative yield, mainly in Europe. In effect, creditors are having to pay in order to lend money, and this has a number of implications for investors.

Currently, 25% of the European sovereign bond market is trading with a negative nominal yield. In France, government bonds of up to 3 years carry a negative yield; in Germany, bonds up to 8 years do; and in Switzerland, bonds up to 10 years. Even more striking, there are examples of corporate bonds with a negative yield. For instance, back in February, yields on the bonds of Nestle (NSRGY) turned negative.

yields in Europe

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Market Realist – Bond yields in Europe have turned negative.

The graph above shows the yield on the 10-year government bonds in Germany, Switzerland, and France. The yields currently stand at 0.2%, -0.1%, and 0.5%, respectively. In fact, the yield on the 10-year Switzerland bond went as low as -0.322% on February 3, 2015.

As the graph suggests, the yields on these bonds have been on a downward trajectory since 2010. This is because the Eurozone has been grappling with deflationary pressures since the financial crisis. This has led to investors fleeing to safety by buying bonds. The German Bunds, in particular, are considered safe.

More recently, the ECB’s QE program has led to a further dip in these yields. As the program is slated to end in September of next year, the yields could continue to remain low. The excess liquidity could support European equities (IEV).

Investment-grade corporate bond yields in Europe have also seen a similar cut. As mentioned above, the yield on the bonds of Nestle turned negative for a while. This is uncharted territory for corporate bonds. The yields issued by pharmaceutical company Roche (RHHBY) also flirted with the minus sign in February.

With real interest rates low in most economies and global equities (ACWI) likely to be be volatile for a while, gold (IAU) could be a good investing option.


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