Negative Nonsense

Japan’s central bank (BoJ) announced on Friday they would be implementing negative interest rates as their desperation to stimulate growth went up another gear.  For newcomers, BoJ already have the world’s most aggressive quantitative easing program, buying not just essentially ALL bond issuance in the country but equities as well.  They are almost at QE saturation.  So what’s left?  Reduce your official interest rates below zero… Yep you PAY for the privilege of holding government bonds which acts as the final disincentive to holding cash as opposed to risk investing or buying stuff to stimulate ‘growth’.

So Japan now joins a host of countries in Europe (ECB) on negative rates including the likes of Germany and Switzerland out to 10 year maturity.  Indeed there is now a record $5.5 trillion in government bonds trading at negative yields, around a quarter of the index for government bonds.  For more context of the scale, 23% of global GDP will come from countries with negative rates.  US 10 yr Treasuries are not immune and plunged to 1.91% after the announcement.

Such is the level of fear in global markets and desperation by central banks to stave off the inevitable, that we get investors willing to pay for the privilege of parking their money somewhere ‘safe’ on such an epic scale.

Bonds are often considered the alternative ‘safe haven’ investment to gold and silver.  In the past the attraction has been that they yield where gold and silver don’t.  So let’s revisit that equation…  Bonds are at historic low yields (and per above, many negative) which translates directly to historically high prices.  Bonds are debt instruments being issued at a time when it is starting to look like we are nearing the end of a 40 year credit cycle.  On the other hand gold and silver are at historically low prices and thrive in times of economic turmoil.

Below is yet another chart showing parabolic tendencies to add to the others you’re seeing more of lately…