An investment guaranteed to lose money: Government bond yield falls below zero

Thursday, 10 September 2020

Negative yields are a sign of things to come, says ASB.

For the first time, people have been able to buy a Kiwi investment that is guaranteed to lose them money.

After being weighed down by economic pessimism and relentless prodding from the Reserve Bank’s $100 billion “quantitative easing” programme, the yield on 2023 government bonds briefly dipped below zero on Wednesday.

That meant that investors who bought the bonds were doing so in the knowledge they would get less than they paid for them in interest payments and the final redemption payment.

That is assuming they held on to the bonds until their maturity in three years’ time.

Buyers could still profit by selling out to investors ahead of maturity if the yield fell further.

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But that would mean that the bonds would first need to become an even worse investment.

Hamilton Hindin Greene broker Grant Davies tweeted that the negative yield was a “welcome to the upside down”.

ASB said “the first excursion into negative territory” for government bonds was a sign of things to come.

Massey University banking expert David Tripe said it reflected the expectation that the Reserve Bank would cut the Official Cash Rate below zero early next year.

If that happens, banks will be paying the Reserve Bank to hold on to their money in its settlement account.

A negative OCR would put some downward pressure on mortgage rates, Tripe said.

But it was hard to say how much, and fundamentally, low interest rates were not a reason to rejoice, he said.

“They are an indication that the economy is going to be bad for quite a while into the future.”

It has been suggested that a negative cash rate could bring retail home loan rates below 2 per cent.

A negative bond yield is a sign that investors think the value of alternative investments they could invest in – such as shares, housing and gold – is likely to fall.

So far there was not much sign low interest rates are encouraging anyone – other perhaps than the Government – to “get out and borrow”, Tripe said.

“My impression is that the banks’ perspective is that they don’t see demand for borrowing being substantial,” Tripe said.

Borrowing was falling not because banks were short of funds to lend, but because there weren’t credit-worthy borrowers who wished to borrow in the current environment, he said.

Mortgage lending has increased over recent months and $6.6 billion was lent in home loans in July compared to $5.4b in June. Home loan and consumer lending is increasing at a rate of 5.4 per cent per annum, according to the Reserve Bank. But business lending is slower – up just 0.1 per cent. Lending to agriculture is down 1.3 per cent.