Curve Daily Comentary, April 10, 2015


Setting Negative History

Switzerland has set financial markets history by selling their 10 year government bonds at a negative yield.

Letting that sink in, investors are being charged for lending money to the government and for as long a period as 10 years. Countries such as Germany, Finland, Austria and Spain have all sold such issues before, but for much shorter tenors.  232.5 million Swiss francs worth were sold at a yield of -0.055% and was heavily oversubscribed.

It it generally accommentary 1004cepted that bonds such as these are bought as an acceptable strategy in the face of low inflation as well as a way to speculate on prices should yields dive lower and thus capital gains achieved. HSBC’s Steven Majoir, head of fixed income research remarked that “bonds are no longer trading like bonds. They now trade like commodities, with investors speculating on the price”.

Also in Europe, Greece managed to pay 450 million Euros to the IMF overnight and not default on their obligations. What is a worry is that another payment that is twice as big is due in May, along with another 3.4 billion of wage and pensions due to the ECB. The country has already admitted they will be out of cash by the end of the month so another bailout or default is on the horizon. The market forecasts that a bailout will inevitably happen, albeit maybe at the 11th hour. Greek bond yields  have spiked in the last few months, reflecting the lack of demand for Greek bonds and thus increasing their financing costs. Default, however, will cause yields across the market to sharply increase and a flight of funds to safer havens until all the contamination is ameliorated.