The $10tn pile of negative-yielding government bonds is a “supernova that will explode one day”, according to Janus Capital’s Bill Gross, underscoring the rising nervousness over the previously unthinkable financial phenomenon.
Central banks in Europe and Japan have moved their benchmark interest rates below zero. This, combined with investors’ ravenous appetite for bonds, has pushed the yields of more than $10tn of sovereign debt into negative territory.
This is costing investors billions of dollars and forcing many to buy increasingly longer-dated or more lowly rated bonds that still offer positive yields — and has sparked concerns that investors could be exposed to painful losses if yields, which move inversely to prices, snap back up.
In a tweet on Thursday Mr Gross, the founder of bond powerhouse Pimco and now a fund manager at Janus, said: “Global yields lowest in 500 years of recorded history…. This is a supernova that will explode one day.”
The average yield of the global government bond market has slipped to a new record low of 0.67 per cent, according to Bank of America Merrill Lynch indices, and the overall value of sovereign debt with negative yields rose 5 per cent in May to $10.4tn, according to Fitch.
Even a relatively modest rise in yields could cost investors dearly. Goldman Sachs recently estimated that an unexpected 1 percentage point rise in US Treasury yields would trigger $1tn of losses, exceeding the financial crisis losses from mortgage-backed bonds.
Mr Gross joins a mounting chorus of big investors who fret that this phenomenon will end in tears. Capital Group — which manages about $1.4tn — has warned that negative interest rates were distorting financial markets and economies, and might lead to “potentially dangerous consequences”.
Jeffrey Gundlach, the head of Los Angeles-based bond house DoubleLine, recently told a Swiss newspaper that negative interest rates “are the stupidest idea I have ever experienced”, and warned that “the next major event [for markets] will be the moment when central banks in Japan and in Europe give up and cancel the experiment”.
Larry Fink, the head of BlackRock, warned in his latest letter to investors that while low borrowing costs were a boon to many companies and countries, they come at a heavy cost to savers.
“There has been plenty of discussion about how the extended period of low interest rates has contributed to inflation in asset prices,” Mr Fink wrote. “Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future.”
This poses fundamental challenges to the investment industry, according to Philippe Ithurbide, global head of research, strategy and analysis at Amundi.
“Asset management businesses have gradually adapted to this new world but in recent years a new stage has been reached. They have to re-examine the notion of risk-free assets, how portfolios are constructed,” he said. “The low rate environment means that everyone . . . has a long learning curve ahead of them.”