Amount of Negative Yielding Debt Outstanding Continues to Increase

Debt issuance has always been pretty straightforward. A borrower issues bonds that pay interest to entice lenders to part with their money for a period of time. The longer the term of the bond or the riskier the borrower, the higher the interest rate the borrower has to offer. But thanks to over a decade of quantitative easing from central banks that drove interest rates in many countries below zero, a massive amount of debt in existence today has a negative yield. That means that lenders are paying borrowers for the privilege of purchasing their debt. And that bizzaro-world effect shows no signs of abating anytime soon.

Thanks to expectations that the Federal Reserve will start cutting the federal funds rate next month, yields on bonds have been plummeting around the world. And while $12 trillion of debt worldwide had been yielding negative interest rates last week, over $700 billion of negative interest rate debt was added to that total in a single day and over $1 trillion for the week, pushing that total to over $13 trillion of negative yielding debt.

Step back and think about that for a second. Investors have purchased over $13 trillion of bonds that they have to pay to hold. They could stick that cash under the mattress and get a better return, but they’re so fixated on holding financial assets that they’re willing to take a guaranteed loss just to hold bonds.

That’s an indication that not all is well with the economy. Essentially investors are willing to pay borrowers in order to take a guaranteed loss of a few basis points, rather than continue to hold other financial assets such as stocks that could lose even more in the coming months.

One has to wonder why they don’t just hold gold instead. Gold has seen an incredible 2019 so far, starting the year under $1,300 per ounce and now hitting around $1,400 per ounce. Investors who had the foresight to get into gold when it was still cheap are seeing returns of 9% so far this year, with more yet to come. Why pay to hold someone else’s risky debt when you can make money with gold instead?