By Daniel Kruger
A growing number of investors are paying governments in Europe
for the privilege of holding their bonds.
The amount of negative-yielding government bonds outstanding
through 2049 has risen by 20% this year to about $10 trillion, the
highest level since 2016, according to data from Deutsche Bank
The expanding pool of such bonds -- which guarantee that a buyer
will receive less in repayment and periodic interest than the buyer
paid -- highlights how expectations for growth in much of the
developed world have deteriorated.
Government debt sold by countries including Germany, Ireland and
Sweden are among those with negative yields. German debt maturing
in 2024 recently yielded minus 0.42%, while Irish and Swedish bonds
of the same maturity traded at minus 0.32% and minus 0.15%,
respectively. Corporate bonds issued by Sanofi SA maturing in 2022
and LVMH Moet Hennessy Louis Vuitton SE maturing in 2021 also
currently trade at a negative yield, according to data from
Negative yields also mean it will be difficult for developed
economies to revive growth should they enter a recession, with
historically low interest rates still in place. The European
Central Bank's deposit rate is currently minus 0.4%, and policy
makers this year ended bond purchases that were intended to boost
growth and inflation, adding trillions of euros of government and
corporate bonds to the ECB's balance sheet.
"It's just not a great starting point to already have negative
interest rates," said Torsten Slok, chief economist at Deutsche
Bank Securities. "It's getting more and more difficult for policy
makers to respond to headwinds."
Policy makers upended expectations for a rate increase later
this year, and lowered growth and inflation expectations,
suggesting negative interest rates will remain in place well into
the future. In March, the ECB slashed its forecast for real gross
domestic product growth this year to 1.1%, from 1.7% just three
months ago, and its forecast for consumer-price inflation to 1.2%
Consumer confidence also weakened this month, after improving in
the three previous months, according to a monthly European
Commission survey. And that decline followed purchasing managers
surveys earlier this month that showed business activity slowed in
Europe's growth problems are evident in two of its largest
economies. In Germany, where growth has stalled, officials plan on
running a budget surplus rather than stimulating growth by running
a budget deficit. This is a problem because such fiscal restraint
by Europe's largest economy could choke off growth in the rest of
the region. By contrast, in Italy, where the heavy debt burden is
already seen as a problem, officials have proposed borrowing more
to kick-start persistently slow growth.
The discrepancy highlights the conflicts that can arise from
having a monetary union but not a fiscal union and a political
union, said Gershon Distenfeld, co-head of fixed-income at
AllianceBernstein. The ECB sets interest rates for the 19 nations
that use the euro currency, but there is no comparable entity that
coordinates government spending among those countries.
Still, Mr. Distenfeld has bought German government debt at
negative yields, while hedging the euro against the dollar to make
the trade more profitable.
"One day people are going to wake up and say, 'What was I doing
buying five-year German debt at negative yields?' " he said. "But
that may not happen in the next year."
The gap in yields between U.S. government securities and
sovereign debt from Germany of similar maturity has been unusually
wide at near 3 percentage points. That is about what foreign
investors pay on an annualized basis to hedge against fluctuations
in the dollar, and conversely what U.S. investors gain by hedging
against the euro.
Many investors in Europe have opted not to hedge and instead are
buying negative-yielding European debt, pushing those yields
Investors in currencies, which are heavily swayed by
expectations for interest-rate policy, have recently pushed the
U.S. dollar to a 22-month high against the euro. That reflects
speculation that the Federal Reserve is less likely to cut interest
rates than the ECB.
While a weaker currency is good for European exports, it doesn't
provide much help because of continuing trade tensions throughout
the global economy that are slowing commerce, Mr. Slok said.
Policy makers have already moved to make low-cost loans
available to banks in an attempt to stimulate lending, and are
examining a tiered approach to deposit rates. That could exempt
banks from punishing fees imposed by the ECB on part of the excess
liquidity that the firms parked with the central bank.
Richard Sega, global chief investment strategist at Conning, who
manages accounts for pension funds and insurance companies, said he
is buying U.S. corporate and mortgage bonds without hedging for
currency risk for European clients.
Bond yields are significantly higher in the U.S., though
European investors could lose money if the euro were to rally
against the dollar. The chances of that appear slim because
Europe's problems are so extensive, Mr. Sega said.
"I don't think there's a big chance that a resurgence in
European growth leads to tighter financial conditions," he said
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Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
April 29, 2019 10:31 ET (14:31 GMT)
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