Tag: negative yields

David Stockman on the Return of Negative Yields… And What Comes Next

Via International Man

Negative Yields

Among all the financial market distortions and misallocations that result from the Fed’s money-pumping policies, we are hard pressed to think of something stupider and more counterproductive than negative real yields on junk bonds.

The historic yield spread over inflation of riskiest US company securities has ranged between 500 and 1,000 basis points (5–10%) or more. And for the good reason that in combination, inflation and defaults always eat deeply into the coupons so as to remind investors why it is called “junk.”

As it happened, the junk bond yield on the eve of the dotcom crash in the spring of 2000 was 12.48%, reflecting an 875 basis point spread over the CPI of 3.73%.

By the eve of the Great Recession in November 2007, the junk yield had fallen to 9.15% but that still represented a healthy spread of 478 basis points over the CPI, which had increased to 4.37% during the prior 12 months.

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Custodial Risk in New York City

Guest Post by Martin Armstrong

There is about $17 trillion in outstanding negative-yielding bonds. It is far too complicated to go into great detail on a mere blog post. Suffice to say that the negative-yielding bonds are going to crash like something not witnessed since 1931. While a complete default is not likely prior to 2025/2026, we are going to witness the start of the collapse in 2020. These bonds have been bought by PUNTERS who are just trading them back and forth like a game of musical chairs. When the music stops, a lot of people will get caught holding these new 2.0 versions of financial debt bombs.

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FOURTH TURNING ECONOMICS

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – The Fourth Turning – Strauss & Howe

Image result for total global debt 2019

The quote above captures the current Fourth Turning perfectly, even though it was written more than a decade before the 2008 financial tsunami struck. With global debt now exceeding $250 trillion, up 60% since the Crisis began, and $13 trillion of sovereign debt with negative yields, it is clear to all rational thinking individuals the next financial crisis will make 2008 look like a walk in the park. We are approaching the eleventh anniversary of this crisis period, with possibly a decade to go before a resolution.

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