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European and US stock indices are down sharply this afternoon. The reason: the slump in bond yields.

The “Zero Hedge” blog shows and explains what’s going on better than I ever could so I’ve copied these Bloomberg charts from there and will paraphrase the comments.

First up is a chart showing the yield of the 10-year German Bund. Bear in mind that when yields are falling the price of the bund/bond or gilt is going up. What this means is that investors are getting very nervous about upcoming events (the UK referendum, US Presidential Election, summer doldrums) along with the outlook for the global economy.

As “Zero Hedge” points out, yields on German, Japanese and UK government debt are “plumbing historic depths” as can be seen from these charts below. These are yields for ten year government debt. The yield is the annual return (interest rate) that an investor can expect to receive over the life of the bond. So, if you buy a 10-year bond with a negative yield then not only will you receive no interest for the life of that security, but you won’t even get all your money back. Why would you do this? Well, you may consider getting most of your money back better than losing most of it (by buying equities for instance). You also may feel that interest rates (yields) have further to fall so the bond will be worth more in the future. This makes sense if you’re anticipating a no-growth deflationary economic environment, particularly as we now know that central banks are prepared to adopt negative interest rates. 
  
PM Bulletin
   
 From Zero Hedge: “at 2.0bps, 10Y Bunds are inching ever closer to the Maginot Line of NIRP which JGBs have already crossed, and all of this global compression is dragging US Treasury yields to their lowest levels since February's flash-crash... back below 10Y's lowest close level since 2013.”

  
PM Bulletin
  
 “10Y Japanese Government bonds plunged to record lows at – (minus) 15bps!”
  
PM Bulletin
   

“With Gilts down 9 days in a row...”
  
PM Bulletin
  

“And stocks are waking up to that reality...”
  
PM Bulletin
  

Charts: Bloomberg
  

David: As “Zero Hedge” points out, yields on German, Japanese and UK government debt are “plumbing historic depths” as can be seen from these charts below.
  
Disclaimer:
  
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Posted by David Morrison

Category: PM Bulletin


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