The Race to Negative Yields: Historic Action in the Bond Market

  • Markets
  • Michael Gayed

The bond market continues to make history as global deflationary pressures and record central bank easing are driving yields to unfathomable levels.

Back in November I wrote about “The Race to 0%.”  It has now become a race to negative yields.

Let’s take a look at a few examples from yesterday.

1) The 30-year U.S. Treasury yield hit 2.50%, an all-time low below the deflationary collapse of 2008.  A year ago this same yield was close to 4%.


2) The German 10-year yield reached a new all-time low of 0.44%. A year ago it was at 1.92%.


3) The Japanese 10-year yield moved below 30 basis points to a new all-time low.


4) The lowest 10-year yield in the world, in Switzerland, hit an all-time low of 21 basis points.


5) German Bunds now show a negative interest rate from one month through five years. That’s not mistake: five years. In buying these bunds, you are locking your money up for five years and accepting a negative return for it.


The list of countries with 10-year yields hitting all-time lows in the first week of trading in 2015 includes:


Most pundits have cheered this sharp move lower in yields but is it really is good thing?

Only if you believe that lower growth and plummeting inflation expectations are a positive. That sounds crazy, you say. Why would anyone believe this to be a positive? Very simply, because it means even more central bank “action.”

Italian Unemployment Rate at new all-time high? No problem. Italian yields are at all-time lows and the ECB will do more to lift stock prices.


Japan slipping into its fourth recession since 2008? No problem. Japanese yields are at all-time lows and the BOJ will do more to lift stock prices.


This was the critical narrative of 2014, where in the new regime lower (Europe) and even negative (Japan) economic growth is favorable because it means central banks will increase their efforts to lift stock prices.

There is a limit to this reverse logic, of course, and perhaps we are getting closer to testing it. Thus far in 2015 yields have fallen and stock prices have fallen as well. But the narrative will not break easily for it has been ingrained in our heads that central banks can do no wrong and can solve all problems.

Only when faith in these policies inevitably fade and stocks start going down will the narrative change. When this happens, stocks will indeed suffer for a while, but for the economies and people of the world it will be a beneficial change. For only then will policymakers stop focusing on boosting short-term asset prices and start focusing on the structural changes necessary to improve long-term growth.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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