Tuesday, February 9, 2016

The World's Biggest Bubble: $7 Trillion In Negative Government Bonds

The graphic below is staggering. It shows the break down in yields for total government debt around the world. With the Bank of Japan's historic announcement to go negative there is now $7 trillion in government debt which is trading at negative yields.



I assure you this is not "normal" and although people have become numb to negative yields this will end in disaster. Why? Bond values decrease when interest rates rise, and there will come a day when investors demand a return above 0.0% to purchase debt on bankrupt governments.

In addition to the actual bonds there are hundreds of trillions of dollars in interest rate derivatives (think of them as off balance sheet bets). Investors feel comfortable they are covered if interest rates rise because a derivative contract will pay them out when that day finally arrives. The problem, just as we saw in 2008 with AIG, is there is certainly one or many counterparties lurking out there that will not have the money to pay when the insurance claims kick in.

For more see: The Mania Chronicles: 10 Year Japanese Government Bonds GO Negative

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