Amount of Negative Yielding Debt Outstanding Continues to Increase

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.

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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.

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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?