A Peculiar Kind of Bubble

By Charles Sizemore  |  September 30, 2019

There’s about $17 trillion in bonds out there currently trading at negative yields.

Borrowers aren’t paying interest. In a perversion of the financial system, they’re getting paid to borrow. That means lenders are guaranteed to lose money if they hold the bonds to maturity.

Stop for a minute and let that sink in…

Imagine going to your bank to buy a CD and being told by the banker that you’d be forced to pay interest rather than receive interest for the use of your money. You would assume the banker had lost his mind, and you’d take your business elsewhere.

But this is the reality in Japan and across much of Europe.

Negative Yields Around the World

Negative yields wouldn’t be so unusual if they were the result of some short-term quirk. For example, back during the 2008 meltdown, there was such high demand for safety that yields on short-term T-Bills briefly went negative. Given that T-Bills were considered safer than bank deposits at the time, it wasn’t irrational for a manager to buy T-Bills that were guaranteed to lose money.

Better to take a guaranteed small loss than to risk losing everything in a collapse of the system. Again, it was a short-term quirk limited to only the most cash-like bonds.

But that’s not what we have today.

In Germany, the entire yield curve today, all the way out to 30 years, is negative. If you buy and hold a 30-year German bond to maturity, the best you can hope for is to lose 0.097% per year for the next three decades.

Think about how much the world has changed in 30 years.

Back then, Germany was still divided — East Germany was still under Soviet control. The European Union was in its infancy, and there was no euro currency. We can only guess what Germany will look like 30 years from now, but would you be willing to bet on its credit worthiness?

And it gets worse…

Austria, Germany’s neighbor, has a 100-year bond that, while currently sporting a positive yield, only pays 0.72% at current prices.

A 100-year bond. The Republic of Austria didn’t exist 100 years ago — it was part of the Austro-Hungarian Empire, ruled by the Habsburg royal family. And over the following century, Austria experimented with two republics: a domestic dictatorship, and union with Hitler’s Third Reich.

One-hundred years is a long time.

Who in their right mind would lend for 100 years at a yield of 0.72?

A Bubble of a More Cynical Variety

I titled this piece “a peculiar kind of bubble” for a reason.

Normally, you’d associate a bubble with irrational, wide-eyed enthusiasm and a belief that it would be impossible not to make money.

We saw that mentality during the dot-com mania of the 1990s, and again during the housing bubble of the 2000. We’ve also saw smaller versions of this in cryptocurrencies, marijuana stocks, and in “unicorn” tech stocks.

The bond bubble would seem to be a more cynical variety.

Rather than betting on an incredible new future, investors seem to be betting that the Federal Reserve and European Central Bank will bail them out.

No one really expects to hold a negative-yielding German bond for 30 years, or a barely positive Austrian bond for 100. They expect to flip it to a central bank buyer for a quick profit.

It will be a fantastic trade… right until it isn’t.

What’s the Upside?

If yields continue to drop, investors could do well. If the Austrian 100-year bond yield were to drop to 0%, like many of its short-dated peers, investors would enjoy a 37% pop in the price of the bond.

Of course, this could also go the other way…

If the yield were to rise to just 2% — which is what it yielded just two years ago — the price of the bond would drop by nearly half.

This isn’t income investing.

This is high-stakes speculation.U

And it has no place in a retirement portfolio.

In Peak Income, I have no interest in selling to a greater fool. You’ll never see negative yields in my portfolio.

Instead, I find high-quality income investments yielding 5% to 10% that are a little off the beaten path.

To learn more about how Peak Income could help you and your retirement portfolio, all you have to do is click here.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR