Europe's €2 trillion problem: One third of all euro-area government bonds now have negative yields

This won’t be news to people in the government bond trading business. But for the man or woman on the street it might come as a shock:
One-third of all euro area government bonds now have negative yields.
That means investors are now effectively paying to own — literally choosing to lose money — one one-third of government bonds, which investors usually use as a “safe” vehicle for parking money as a hedge against the volatility of the stock market.

The stock of negative yielding euro government bonds is now worth just under €2 trillion (roughly $2 trillion), according to the Bank of International Settlements:

As a subsequent series of speeches by ECB officials were interpreted as signals for an expansion in monetary accommodation in early December, yields continued to fall and term premia dipped further into negative territory (Graph 4, left-hand panel). By the end of November, the stock of euro area government bonds that carried negative yields had risen to more than €1.9 trillion, or approximately one third of the total market (Graph 4, centre panel).

Here are those charts:

And the craziness is set to continue. The European Central Bank last week cut its deposit rate from -0.1% to -0.3%. That move will likely force Switzerland’s central bank to take its overnight rate further into negative territory. It is currently at -0.75%. The Swiss want their franc to trade more cheaply than the euro.

Why would investors and institutions tolerate these guaranteed losses? Well, those losses look pretty good if you’re afraid that other investments will become even riskier in the future… so the euro area government bond market appears to be signalling something very scary indeed.

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