No one knows how to back out without blowing up the whole system
The amount of government bonds that sport negative yields – an all-too-real absurdity where bondholders in effect are shanghaied into paying the government for the privilege of lending it money – has soared 12.5% after the Brexit vote, from $10.4 trillion at the end of May to $11.7 trillion as June 27, Fitch Ratings reported today.
The action was in longer-dated bonds, with maturities of 7 years and over. Those with negative yields soared to $2.635 trillion, up 62% from the end of May and up 93% from the end of April, having nearly doubled in two months!
The German 10-year yield fell below zero during the period, now at -0.124%. Japanese yields are below zero all the way out to 17 years. And ‘virtually all’ of the Swiss sovereign debt luxuriates in negative yields.
The short end, with maturities of 1-year an under, didn’t see that much action, with negative yielding bonds rising less than 1% in May and 5% in June, to $3.232, trillion. And negative-yielding bonds with maturities between 1 and 7 years edged up 2.4% in June to $5.849 trillion.
The amount of German bonds with negative yields rose by 8% and French bonds by 13%, to over $1 trillion each. And yet an amazing thing happened – despite Draghi’s best efforts: Italian bonds lost some ground, and those with negative yields dropped by $200 billion since the end of May, likely a reflection of ‘investor risk aversion related to Italy leading up to and following the Brexit referendum.’ Ah yes, Italy’s banking crisis that is now advancing to the next level.
This post was published at Wolf Street by Wolf Richter ‘ June 29, 2016.
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