Investors are trying to make sense of this new abnormal. Justifications offered include:
1) Anticipating future deflation with no real economic growth;
2) Investing for currency gains while accepting the interest return will be negative;
3) Speculating rates will continue their negative trajectory because that has been the trend – reasoning it is still a profitable bet. Also, as more bonds go negative, downward pressure is applied to the bonds with positive yields, driving their yields toward zero and beyond;
4) Hypothesizing that, all of a sudden, an aging society with plentiful savings are enough to convince investors a positive return is no longer important. This argumentis the most controversial – and alarming. It eradicates the most basic law of finance: there is a time value of money – the idea that a dollar in your pocket today is more valuable to you than that same dollar in your pocket a year from now.
None of these reasons taken on their own adequately describe what is happening. And, some of these reasons lack hard evidence that they are credible. Maybe all are part of the unsolved equation as to why nearly 1/4 of the world’s bond supply trades at yields below zero.
Or maybe it’s just another crazy bubble, like placing a higher value on the Imperial Palace of Tokyo (280 acres) than all the real estate in California.
At present, the U.S. has avoided life below zero. It is a meaningful barrier and one we don’t want to breach.