Bond Guru Says Negative Yields Are Dangerous - June 19, 2016

Bond Guru Says Negative Yields Are Dangerous

Negative interest rates can harm the economy and aren’t good for the investors – we have pointed this out several times during the last months. Now bond guru Bill Gross warned about the dangers of the negative yields on government bonds. He believes that this can be “a supernova that will explode one day”. He wrote this just some days before the yield on the 10-year German bund fell negative for the first time ever. We believe there might be ways to keep ourselves out of problems.

MarketWatch wrote an article about Gross’ fears, noting that the expert manages Janus Capital’s bond strategy. As he said: “Global yields lowest in 500 years of recorded history.” He also notes that the amount of public bonds bearing negative yields at the moment totals to $10 trillion. This means that this amount of investment will not bring interest to the investors.

As the journal notes, last week yields continued their descent and the 10-year German bond hit a record low at 0.015%. Just days after the article, the German benchmark bond fell further, into negative territory for the first time ever with a yield of 0.0020%. The yield on Britain’s equivalent fell to a historic low of 1.229%, writes MarketWatch. Japanese, other European and U.S. bonds are low at the moment as well, some of them even at a negative yield.

At the end of May, we wrote about the negative effects of this trend. In our press release - which was published in several journals like Yahoo Finance and Bloomberg - we wrote: “negative interest rate is a crippled device, since it doesn’t help economic growth, but supports higher number of investments, sometimes even the ones with unnecessary risks”. We still believe that an interest rate closer to 1-2% would be better for the economy.

Stock markets are having a hard time because of the negative yields as well, wrote MarketWatch.

Nonetheless, they still have better returns than bonds, so many people with a wish to invest turn to them. Another hit might be real estate, but there are already signs of a new real estate bubble, if banks are not loaning carefully. (What’s more, real estate isn’t always the greatest choice.)

Altogether, we believe that in this situation the best solution is to have a well-diversified portfolio that has stocks and other instruments as well. When there’s uncertainty in the market, it’s also a good idea to be patient, since a long-term investment has the capability of balancing ups and downs on the market.