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Financial World Gone Nuts: $15 Trillion Negative Yielding Debt

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Published : August 07th, 2019
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Category : Editorials

12 countries with negative 10-year yields. A race to hell.

Every day brings new indications that the financial world is going from already nuts to even nuttier. According to Bloomberg, the total amount of bonds outstanding globally that are trading with a negative yield exceed for the first time $15 trillion. This includes government and corporate debt, and also some euro junk bonds that have joined the elite group (click to enlarge):

A chart like this, of markets and central banks chasing each other further and further into the negative-yield absurdity is crying out loudly: “Somebody has got to put a stop to this race to hell.”

The Fed was dabbling in trying to stop this race that is now leading ever deeper into negative-yield absurdity, and had even tried to reverse it, and got shouted down as can be seen in the above chart.

The good news first:

Yes, there are still juicy yields out there, but you have to risk your first-born to get them, if you’ll ever get paid the interest or principal. For example, Zambia. The 10-year yield on its euro-denominated bonds is now over 31%.

Moody’s rates Zambia’s government debt Caa2, just three tiny notches from default (my plain-English cheat sheet for credit rating scales by Moody’s, S&P, and Fitch). Moody’s cited the high debt burden, liquidity risk, and external vulnerability.

On June 19, Zambian President Edgar Lungu announced that “Zambia is not in a position of a crisis.” He had some wise words for creditors and debtors alike:

“When you find that you are being strangled by debt, you hold back and see how you can realign your position so that in the end you continue being alive, you don’t suffocate. That’s where we are now.”

Investors, and the bankers that made all this possible, and China’s strategy to put its imprint on Africa have left their mark.

Zambia’s government debt was $2 billion in 2011. And that was manageable for a small pour country with big challenges. Then the bankers got a hold of investors who were chasing yield in the world where NIRP had arrived. And the Chinese construction boom, funded by Chinese loans, washed over Zambia with new airports, roads, and factories. By 2018, so in just seven years, Zambia’s official debt had quintupled to $10 billion.

But last year, suspicions arose that the debt was even larger, and that the government was hiding some of its debt. It wouldn’t be that far-fetched. Mozambique’s government had to admit in 2016 that it had hidden $2 billion in debt.

So maybe Zambia is not such a great place to chase yield. Maybe something like Turkey’s government bonds would be better. The 10-year yield is 15%. Turkey is currently in a financial crisis and a currency crisis, and outcomes remains iffy.

Or try Argentina’s dollar-denominated bonds. Argentina’s inflation tends to run between 20% and 40% a year. But these are dollar bonds, so Argentine inflation doesn’t impact them. They’re impacted by the risk of default. Argentina is the king of defaults, defaulting with utmost reliability on its foreign currency debts and then attempting to impose haircuts on its creditors. But current creditors don’t seem to mind future haircuts, and the 10-year yield is only 6.2%. If you need a haircut, go for it.

Then there is Mexico where the 10-year yield on peso debt is 7.7%, which is above Mexico’s rate of inflation, but not by much. Inflation exceeded 6% in 2017 and is currently running at around 4%. And 10 years is a long time for inflation in Mexico to run wild again, which would wipe out the purchasing power of these bonds.

But this is the kind of thinking you do when trying to escape negative yields or near zero yields.

The bad news: the NIRP zone is growing octopus-like.

There are no more German government bonds that trade with a positive yield. The German 30-year yield, for bonds due in 2048, the longest term available, dipped into the negative briefly on Friday for the first time and sank solidly into the negative on Monday and Tuesday, currently at negative -0.036%.

The Swiss 30-year yield has been negative since mid-2016 and is now at negative -0.322%. But the Japanese 30-year yield is still positive at +0.29%.

Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.

Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don’t really care. It’s other people’s money, and they’re going to change jobs or get promoted or start a restaurant or something, and they’re out of there in a couple of years. Après moi le déluge.

10-year yields.

There are now 12 countries on my list whose government debt sports negative 10-year yields. Switzerland is the master, with a 10-year yield of -0.92% followed by Germany, with a 10-year yield of -0.53%, down to Slovenia in 12th position with a 10-year yield barely in the negative of -0.04%. Japan is in 10th place.

The US, with its 10-year yield today of 1.73% is in 30th position on my list of 51 countries and their 10-year yields as of August 6, 2019 (see list below). This puts the US two places behind Italy, in 28th place, with a 10-year yield of 1.51%. Think about this for a moment: The list has only 51 places, and the US with a ridiculously low 10-year yield of 1.73% is all the way down in 30th position!

Greece, which defaulted on its debts in 2012 and imposed big haircuts on holders of Greek government bonds, is in 33rd place with a 10-year yield of 2.02%.

At the bottom of the list is, well, Zambia. Nigeria, Pakistan, and Turkey make up the remainder of the double-digit club:

Pos.

Country, as of Aug 6, 2019

10-year yield

1

Switzerland

-0.92%

2

Germany

-0.53%

3

Denmark

-0.49%

4

Netherlands

-0.43%

5

Austria

-0.30%

6

France

-0.27%

7

Finland

-0.27%

8

Sweden

-0.21%

9

Belgium

-0.20%

10

Japan

-0.18%

11

Slovakia

-0.14%

12

Slovenia

-0.04%

13

Ireland

0.04%

14

Spain

0.23%

15

Portugal

0.27%

16

Bulgaria

0.45%

17

UK

0.52%

18

Taiwan

0.68%

19

Australia

1.04%

20

Croatia

1.05%

21

Czech Republic

1.06%

22

Israel

1.06%

23

Hong Kong

1.17%

24

Norway

1.18%

25

Canada

1.23%

26

South Korea

1.24%

27

New Zealand

1.29%

28

Italy

1.51%

29

Thailand

1.71%

30

US

1.73%

31

Singapore

1.77%

32

Hungary

2.01%

33

Greece

2.02%

34

Poland

2.09%

35

Chile

2.79%

36

China

3.08%

37

Iceland

3.85%

38

Romania

4.23%

39

Philippines

4.55%

40

Argentina

6.20%

41

India

6.34%

42

India

6.34%

43

Brazil

7.26%

44

Russia

7.31%

45

Mexico

7.43%

46

Indonesia

7.70%

47

South Africa

8.40%

48

Nigeria

13.69%

49

Pakistan

13.77%

50

Turkey

15.10%

51

Zambia

31.25%

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Wolf Richter is based in San Francisco. Entrepreneur with over twenty years of C-level operations experience, including turnarounds and startups.
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