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Switzerland has become the first government in history to sell benchmark 10-year debt at a negative interest rate, as falling prices and unprecedented action by the world’s major central banks send global markets further into unknown terrain.
Bonds with negative yields have become one of the world’s fastest growing asset classes, accounting for around a quarter of Europe’s government debt market. In the last year Germany, Austria, Finland and Spain have all sold shorter-term debt at sub-zero yields.
But this is the first time that investors were effectively charged for lending money to a government for such a prolonged period. They bought SFr232.51m (€222.4m) of Swiss debt that will not be repaid until 2025 at a yield of -0.055 per cent — and the issue was comfortably oversubscribed.
The rush into European bonds is the consequence of the global slide in inflation, which has made it easier for investors to accept negative yields as they expect prices to rise slowly in the future. Prices in Switzerland fell by 0.9 per cent in the year to March, while inflation in the eurozone stood at -0.1 per cent.
Policy makers have responded to the fall in prices by cutting interest rates and launching programmes of asset purchases. The European Central Bank last month bought €52.5bn-worth of government bonds, as part of its €1.1tn quantitative easing scheme to revive the eurozone economy.
In anticipation of the ECB’s announcement of full blown quantitative easing in January, the Swiss National Bank lowered the interest rate it charges on deposits to -0.75 per cent while removing its currency ceiling against the euro.
The US Federal Reserve continues to eye an increase in interest rates in 2015, but minutes from its March Federal Open Market Committee meeting show that weakening economic activity since the start of the year has made some policy makers more cautious.
Meanwhile, the Bank of Japan remains in easing mode, as it presses ahead with asset-purchases worth Y80tn a year.
“We have unconventional central bank policies at work so you have to expect unconventional outcomes,” said Steven Major, global head of fixed income research at HSBC. “One is that bonds are no longer trading like bonds. They now trade like commodities — with investors speculating on the price.”
The Swiss issue followed an equally remarkable auction by the Spanish government this week, with Madrid issuing short-term debt at a negative yield less than three years after requesting an international loan to rescue its struggling banking system.
Policy makers have moved to take advantage of the cheap borrowing rates available on capital markets by accelerating public borrowing schedules and taking out record amounts of longer term debt.
Meanwhile, investors such as pension funds and insurance companies say the trend has forced them to take on greater risk in search of adequate returns.
“How much this matters across wider markets and how long it will last is something strategists are wrestling with,” said James McAlevey, head of interest rates at Henderson Global Investors.
“Bond markets are heavily distorted by government policies. They won’t return to normal until central banks start raising interest rates again.”
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