Negative and Close to Zero Yields of Government Bonds and the Reasons

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George Dorgan
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We judge that negative or close to zero yielding government bonds reflect four points: Risk off environment, long-run currency gains on currency with low inflation, insufficient supply of government bonds for bank refinancing purposes.

1) Risk-off: Before the 2008 crisis, people increased their debt and reduced their savings rate, the ratio between new savings and their income.

Now this has become different, everybody seeks a safe-haven to preserve wealth. Given the demographical issues, household savings rates have stabilized and do not fall any more.

Swiss investors hate risk even more than others. Therefore they do not dare to “export” their trade and current account surplus of 14% of GDP with an equivalent flow inside the “financial account” of the balance of payments. They refuse to purchase foreign bonds, stocks or direct investments and prefer to create a Swiss real estate bubble, with the associated lending.

This applies in particular to risk-averse pension funds that buy such near zero-yielding bonds denominated in CHF.

2) Currency Gains in the long-run: Similar to the Czech Krona, and the Chinese Yuan, currencies with strong current account surpluses and low inflation must appreciate over time. Hence despite low yields, investors will obtain a currency gain one day – early in the case of the yuan, a bit later with CZK bonds and finally also on CHF bonds. Global deflation has moved the currency gain on CHF into a more remote future. The Czech and the Swiss central banks execute a new form of monetary policy. It is called QEE , quantitative easing and exchange rate intervention. The fact that these currencies, CNY, CZK and CHF must appreciate thanks to lower inflation and competitiveness is reflected in the interest rate parity. Holding these bonds, risk-averse investors sleep well.

The Russian Rouble currently represents the opposite: Inflation is too high and the central bank cannot slow it down. This has been intensified by the oil price collapse.

Negative yields can arise when point 1) is more important than 2).

3) Banks need government bonds to refinance themselves. Those safe assets function indirectly as means of refinancing for rising money supply and is needed to give loans to the private sector.  When government debt is low, then the bond supply is insufficient compared to the desire to invest. Typically central banks would hike rates to limit investments. They currently do not hike rates, because money supply does not translate in higher wages. See the strongly rising Czech money supply and the massive growth of Swiss money supply.

Bank risk management requires a certain maturity equivalence between collateral and credit to the private sector. Therefore the bank is able to pay negative yields on certain maturities. But the bank still profits on  the package between negative bond yields and gain on the loan.

The Czech case is mostly driven by points 2) and 3) while the Swiss one corresponds mostly to 1) and 2).

Furthermore, low inflation globally contributes to low bond yields: Easy money led to heavy investments in China and other Emerging Markets. Easy money helped to distribute labor globally, often into less utilized resources in previously less privileged countries.
Finally over-capacity and over-producing of goods in these countries helped to reduce prices around the world.

Near-Zero Bond Yields in 2014

The Swiss 50 year bond maturing on 2064 now trading at a yield to maturity of less than 0.9%.

Point 2 and 3 become clearer when we look at the article provided by the Financial Times

2 Years Government Bonds Yields under zero in 2012 and 2013

After the first time End May 2013, the 2 year German Schatz turns negative again on July 18th 2013.

Swiss 2yrs still at -0.4%

2 years Government Bonds July 18 (source Bloomberg Brief) - Click to enlarge

Government bond yields under 1% July 18th - Click to enlarge

Government Bonds on Financial Times, on Forexpros

On Bloomberg more Yields:

French BTAN 1 year,  BTAN 2 years, BTAN 5 years, French 10 years

Italy 10 years 
Spain 10 years
German Bund 10 years  German Bobl 5 years (“Bundesobligationen”),

German 2 years Schatz (“Schatzanweisungen”)

Swiss 10 yrs Eidgenossen

The spread between Swiss 10 yrs Eidgenossen and German Bund

US Treasuries: 10 years,  5 years US Treasuries

UK Gilts: 10 years, 5 years

Bloomberg Bonds Internet Quickstart	1M	3M	1Y	2Y	5Y	10Y	15-30Y	Yield curve	Inflation
Switzerland (Eidgenossen)	yield	yield	yield	yield	yield	yield	yield		Swiss inflation
Germany (BuBills, Schatz, BOBL, Bund)	yield	yield	yield	yield futures	yield futures	yield futures	yield	Germany	German CPI
France (BTAN,Oat)	yield	yield	yield	yield	yield	yield	yield		France CPI
Italy (BTP)		yield	yield	yield	yield	yield	yield		Italy CPI
Spain (Bonos)		yield	yield	yield	yield	yield	yield		Spain CPI
UK (Gilts)	yield	yield	yield	yield futures	yield futures	yield futures	yield	UK	UK CPI
United States (Treasuries)	yield	yield	yield	yield futures	yield futures	yield futures	yield	US	U.S. CPI
Japan (JGBs)	yield	yield	yield	yield futures	yield	yield futures	yield	Japan	Japan CPI

About George Dorgan

George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

My articlesMy siteAbout meMy books
Follow on:LinkedINTwitterSeeking AlphaCFA SocietyEconomicBlogs