Yielding Nothing

What’s up with negative interest rates?

Source: Bloomberg

The last auction Germany held for their 2-year bunds produced an obligation sold are par with no coupon. The bonds promptly went to a premium, resulting in a negative yield. Around the world, yields for 2-year Government bonds are negative in Germany, Holland, France, and Switzerland. In Switzerland it’s especially bad: you have to pay a 4 ¼% premium to get a 2-year note with a 2% coupon.

From a long-term investor’s perspective, this doesn’t make any sense. Why buy something that is guaranteed to lose money? No, this is a currency play. Investors paying these premiums are betting—or hedging bets—on a breakup of the Euro.

The clearest indicator of this is Switzerland. That country isn’t part of the Euro, but is closely tied to the Euro-zone’s fortunes. In August 2011 their central bank pegged the Franc / Euro cross rate. In 2012 there was broad speculation that they wouldn’t maintain their peg, and their 2-year notes went to negative 0.42%. In the end, the Swiss were able to defend the Franc’s level, and speculators lost out. But Swiss 2-year yields are still negative.

Source: Bloomberg

Negative nominal yields indicate that something isn’t right. At present, they point to speculative pressure on the Euro. A lot of folks still expect the common currency to break up, and they’re willing to accept negative short-term yields from Europe’s strongest economies as a hedge on that position.

So US investors shouldn’t complain too loudly about ultra-low interest rates over here. As Europe shows, it can always get worse.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By | 2017-07-17T12:34:13+00:00 October 3rd, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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