According to Citi, if you were to buy, at random, any developed market government bond around the world, there is a one in three chance you’d lose money if you held onto it until it matured. That is, about a third of all developed-country government debt—or more than $7 trillion, in terms of market value—is now trading at negative yields. Quite simply it means that investors are paying Governments to lend them money. Seems like another form of taxation to me or bad investing. Let me see, give ‘em $100 and a few years later getting back $99. Sounds good? It has been estimated in the euro zone, more than half of all outstanding bonds are priced as such. Am I the only one who finds this more than weird or that people are actually even considering handing over their money?
At least here in the US, our entire yield curve is positive (for now). It makes sense that smart, sensible foreign savers who would prefer not to pay to lend money, will move (at least some of) their investment capital to places that provide favorable returns. As such is there any doubt that some of that money will find a home here in US bonds? A small return with (perceived) small risk is way better than paying for a similar risk. We learned in Econ 101 that as more money chases after a good or service (in this case positive yielding bonds) you should expect a rise in prices. How many of you think this has had an effect on our US 30-year treasury bond? Take a look at the chart below as it affirms this thesis as it sits at all time highs
Because one of the only arrows left in Central Bankers quiver to (attempt to) stimulate growth and fight deflation is manipulating interest rate (more negative), they have boxed themseleves into a corner. And unless they can regain their sanity (yah right! me of little faith) and unwind this foolish experiment I expect the foreign inflows to grow, pushing our rates even lower and our currency higher.
This underlying theme is one reason why the stock market COULD move contrary to all fundamental logic and reason higher. The cause and effect.