{"id":67243,"date":"2015-01-28T05:04:43","date_gmt":"2015-01-28T10:04:43","guid":{"rendered":"http:\/\/countingpips.com\/?p=67243"},"modified":"2015-01-28T08:01:33","modified_gmt":"2015-01-28T13:01:33","slug":"negative-yielding-bonds-proliferate","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/01\/negative-yielding-bonds-proliferate\/","title":{"rendered":"Negative-Yielding Bonds Proliferate"},"content":{"rendered":"
January 28, 2015<\/div>
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By WallStreetDaily.com<\/span><\/a> \"Negative-Yielding<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

Today, there exists roughly $4.6-trillion worth of negative-yielding government bonds around the world.<\/p>\n

Indeed, we\u2019ve now entered a fifth dimension, beyond that which is known to most investors\u2026 A dimension where bank deposit rates are negative, purchasing power is constantly destroyed, and risk can exist without return.<\/p>\n

In last week\u2019s episode of the Fixed-Income Twilight Zone<\/em>, the European Central Bank (ECB) announced its highly anticipated bond-buying program, or quantitative easing (QE). Each month until at least September 2016, the ECB will purchase 60 billion euros\u2019 worth of bonds issued by euro-area central governments and agencies.<\/p>\n

The ECB also confirmed that its purchases would include negative-yielding bonds. The German yield curve is negative out to four years, and France\u2019s is negative out to three years.<\/p>

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Of course, buying negative-yielding bonds won\u2019t do much to help the approximately 7.5 million Europeans between the ages of 15 and 24 who are neither employed, nor in education or training\u2026<\/p>\n

Nonetheless, when economies are facing deflation, central banks ramp up stimulus.<\/p>\n

Japan, which has been on monetary morphine for years, has a yield curve below 0.1% all the way out to six years.<\/p>\n

Now, some institutional investors, pension funds, and insurance companies in Japan and Europe may have<\/em> to hold ultra-low-yielding bonds in order to adhere to mandates or track benchmarks.<\/p>\n

But we\u2019re under no such requirements.<\/p>\n

That\u2019s why U.S. investors should avoid a group of international bond funds with sizable exposure to ultra-low-yielding government bonds.<\/p>\n

The Vanguard Total International Bond Index Fund<\/strong> (VTABX<\/a>, VTIBX<\/a>) has $27.6 billion in assets under management \u2013 three-quarters of which are government bonds. It has a 22.0%, 11.5%, and 9.5% allocation to Japan, Germany, and France, respectively. A similar ETF version of this fund, the Vanguard Total International Bond ETF <\/strong>(BNDX<\/a>), has a lower allocation to Japan, but higher allocations to the U.K., Italy, and Spain.<\/p>\n

Another mutual fund, the American Century International Bond Fund<\/strong> (AIDIX<\/a>, BEGBX<\/a>), holds 94% government bonds and has a 25% exposure to Japan.<\/p>\n

Finally, a pair of State Street ETFs are stinkers, as well. The SPDR Lehman International Treasury Bond <\/strong>(BWX<\/a>) should have been sold in mid-2014. Mathematically, I\u2019m not even sure how a government bond fund would lose over 8% on a total-return basis in the past six months, but this fund did it. The SPDR Barclays Short Term International Treasury Bond ETF<\/strong> (BWZ<\/a>) has such a low yield that it\u2019s not worthy of consideration.<\/p>\n

From a risk-return standpoint, there\u2019s really no reason to own any of these funds. Basically, bond portfolios loaded with Japanese government bonds, German bunds, and French OATs have a huge weight around their necks.<\/p>\n

I wouldn\u2019t underestimate QE\u2019s ability to artificially boost European financial asset prices (corporate bonds and stocks) and support excessive risk-taking, just as has occurred in Japan. Just make sure your bond funds don\u2019t have significant exposure to the government bond markets in either region.<\/p>\n

As I predicted, U.S. rates have declined, following global rates lower. Treasuries are virtually \u201chigh yield\u201d compared with bonds in many other developed nations. The U.S. 10-year is currently at 1.82%.<\/p>\n

And just imagine how far yields will fall if we get some real fear in the U.S. equities market.<\/p>\n

Yet traders are still hugely short Treasuries<\/a>, aggressively betting on higher rates for some reason. Don\u2019t make the same mistake as them\u2026 There\u2019s no telling what could happen in the fixed-income fifth dimension.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Negative-Yielding Bonds Proliferate<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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By WallStreetDaily.com By Alan Gula, Chief Income Analyst Today, there exists roughly $4.6-trillion worth of negative-yielding government bonds around the world. Indeed, we\u2019ve now entered a fifth dimension, beyond that which is known to most investors\u2026 A dimension where bank deposit rates are negative, purchasing power is constantly destroyed, and risk can exist without return. […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-67243","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/67243","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=67243"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/67243\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=67243"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=67243"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=67243"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}