Thursday, January 22, 2015

On those negative Swiss yields and what they don't mean

Some odd explanations are being offered for the negative yields seen recently in several countries' debt markets. Today, Swiss bond yields went negative right out to 15 years, quite an historic anomaly. Why?

Contrary to what I've seen and read through several outlets, negative bond yield does not mean that individual investors knew, a priori, that this would happen. It does not mean that they are cheerfully willing to accept losses over the term of a bond, just to put their money somewhere.

We have to remember that a lot of capital is moving simultaneously but also independently from many different directions, into the rather small Swiss debt market. Certainly, Switzerland is a magnet for safe-haven investing, particularly after they unpegged from the Euro a few days ago. Now there are many large investors moving their capital, and they are all doing so very quickly because of a variety of factors: oil price collapse, eurozone deflation, currency collapse...many separate reasons. There is a widespread sentiment that something really big might go down e.g. Greece could move to sever itself from the Eurozone, or Russia could realize they are going to default and start behaving even more belligerently, to (so to speak) get it over with in Ukraine. China could confess that their GDP numbers are twice cooked. A lot of things could happen.

Now, if many investors, working independently, spooked by their own economy, decide that a low-yield Swiss bond is the safest and most convenient place to put their money for now, and if Switzerland isn't offering much new debt to match the demand, then that collective behavior can force the yields negative.

How much debt can the Swiss offer? Well their entire national debt is only about $127B...yes billion, which is tiny, and it's only ~35% of Swiss GDP. By comparison, US debt is above 100% of GDP, at ~$17T, currently. So it's very easy to distort Switzerland's yields, and much harder to distort ours.

All of this doesn't mean the magnetic poles have flipped or Draghi has released antigravity or whatever. It means that a teeny tiny debt market in a small economy has been distorted by a lot of capital rising in from many different directions.

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