Graphique Historique de l'Action
6 Mois : De Avr 2019 à Oct 2019
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 Securities.
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 FactSet.
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% from 1.6%.
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 April.
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 lower.
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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