Publications
Partners
Last year I wrote about the oddity of negative-yielding debt, whereby somebody lending money would not receive any return on their investment.
Instead, they would get back less than they’d loaned out, effectively paying the borrower to lend them the money.
I commented then that this was wildly crazy and that I would dig deeper to write a follow-up column.Well, the good news is here’s the follow up.
The bad news is that it is no less crazy, and I still have no real idea how it ends, but I have some thoughts.
More good news is that at the end of 2019 negative-yielding debt had dropped to about $11tr, down from a high of $17tr in mid-2019, according to Bloomberg research.
So, it is unwinding, but there is still about a quarter of investment-grade debt yielding negative returns.
The first issue is that negative yields are not that new. An asset such as gold offers zero yield and the cost of storing it effectively makes it a negative-yielding asset.
Furthermore, even money earning interest in the bank has often seen interest rates below inflation, resulting in a negative real return in that your spending power is decreasing; a form of negative yield.
But if one is paid to take on debt – and Jyske Bank, Denmark’s largest lender, was offering ten-year negative-yielding home loans last August – then, surely, we all just take on as much debt as possible?
This will boost asset prices as we’re all gorging on debt and spending it on assets and making money. This is, in essence, at the heart of negative-yielding debt; spurring on asset purchases that will increase wealth and in theory ultimately lead to inflation.
Now, we’ve seen asset prices rising, but globally we’re not seeing any consumer inflation. We’re seeing asset inflation, but not in general day-to-day living because this negative-yielding debt is going into assets rather than consumption.
But eventually, even with negative yields, investors will look at asset prices and refuse to pay the inflated prices. Then the whole circus starts to fall apart, and the result is a stampede for the exits that sees a massive collapse in asset prices.
These sorts of asset price collapses are usually dealt with by central banks lowering interest rates. Those rates, however, are already so low that any subsequent lowering will have to entail deeper negative yields, and so the spiral continues.
A chart I can’t find, but would love to see, is the global GDP value over time compared with asset values over the same period.
There is most certainly a widening gap between GDP and asset prices, where asset prices are increasing at a faster rate than GDP.
This is the asset price boom that we’re witnessing now thanks in large part to negative yields.So how does this unwind itself? The global economy is addicted to debt.
Like any addict giving up the addiction, this is a hard and painful experience.
Do we then have to see a large, wholesale debt relief at sovereign, and maybe even at corporate levels? This would send the wrong message to borrowers and just ensure the next debt bubble.
Another alternative is either serious asset price pain or, perhaps we’ve entered a new reality – that of low and negative interest rates? Why should rates be high in any case?
The theory is that it protects lenders against borrowers defaulting. But what if the lenders are sovereigns (states) that control the money printing presses? Do the lenders then need as much protection as was previously thought?
I know I am pointing out problems and offering no real solutions, but as the Chinese curse goes: “May you live in interesting times.” And boy, do we. I don’t know how it will end, but I am certain that prolonged cheap debt is dangerous.
This article originally appeared in the 20 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
