July 29, 2016


Maybe Negative Yields Are a Sign of Prosperity (Tyler Cowen, 7/27/16, Bloomberg View)

 On average, yields on Treasuries have been falling since 1926 (!), due largely to their safety and liquidity. They've almost become a form of money, offering liquidity and safety comparable to cash. So it shouldn't come as a complete surprise if longer-term U.S. government securities and some corporate bonds recently have followed a similar path because that would just represent an extension of the historical trend. 

In this view, very low or negative yields need not reflect major cause for concern. The many years of falling yields include periods of both rising and falling economic growth, so higher global growth in the future may not reverse the trend. In fact, higher growth and greater wealth could raise rather than lower the demand for insurance and liquidity, and thus lower yields.

Perhaps the most overlooked point is that the supply of negative-yielding securities is not so large relative to total global wealth. A recent Credit Suisse estimate suggested that global wealth could reach $369 trillion by 2019, reflecting growth rates of perhaps 7 percent a year. Such numbers are typically inexact, because who can measure the value of all the land in China and the buildings in Uzbekistan? Nonetheless, this number is truly large and it has been growing rapidly. By comparison, the negative-yield securities seem like not such a big deal.  

Maybe it's time we started thinking of negative securities as the equivalent of fire or earthquake insurance for that wealth. If there is truly $300 trillion in global wealth, is it so crazy to think that investors would pay a premium to buy $10 trillion dollars' worth of insurance? 

...is insufficient American debt.

Posted by at July 29, 2016 9:19 AM