More than $ 17 trillion is stuck worldwide in bonds with a negative return. This is cause for concern for bankers, economists, entrepreneurs and investors, at least in the long term.
17 trillion reasons
Cameron Winklevoss is the founder of crypto exchange Gemini. He shares the opinion that the threat of negative-yielding bonds is indeed real.
$ 17 trillion dollars are currently held in negative interest bonds. 17 trillion reasons why you should own bitcoin.
– Cameron Winklevoss (@winklevoss) October 17, 2019
Winklevoss added that those 17 trillion dollars in negative-yielding bonds are also 17 trillion more reasons why people should invest in Bitcoin.
To put that $ 17 trillion in perspective, this is twice the value of all the gold ever mined and 115 times the value of the entire bitcoin network.
Despite negative return, rising rate
Bloomberg writes that thirty percent of all bonds yield negative returns. This means that if investors buy such a bond and hold it until the end of the term, they are guaranteed to lose money.
Yet investors continue to buy bonds because the base price continues to rise, and they want to take advantage of that. There may also be favorable exchange rates, which means that certain bonds can be bought out cheaper
So there is a market for negatively-yielding bonds, and that is still to say the least. The price continues to rise so that there is already talk of a bond bubble. As a result, pension funds lose a valuable source of income and riskier companies are encouraged to use their assets. At the same time, banks must reassure citizens that they do not suddenly ask for money to store their money with them.
Italian bonds have a major contribution to the number of loss-making bonds. But corporate bonds also contribute, think of the bonds of Siemens AG, never before has there been a bond with such a negative return. And even with these bonds, some investors are disappointed that they did not have the opportunity to participate.
How does a negative return on a bond work?
Very simple actually. Suppose a bond with a term of 5 years is worth 10 euros. Every year you get a 10 percent return on the original value of 10 euros, which is 1 euro per year. After the 5-year term, you will receive that 10 euro back and every year you have received 1 euro. In total you get 15 euros back on an investment of 10 euros. Sounds beautiful.
But those bonds are negotiable and the price rises when there is more demand. The moment a trader pays more than 15 euros for that bond, he cannot take a profit on the return. He is betting on a price rise in the bond. This is called a negative return.
Insure yourself with bitcoin against this Ponzi
Shilpa Lama from beincrypto calls this a typical example of a Ponzi. Rhytm also sees it that way.
Negative yeilding debt is twice the value of all gold ever mined, and 115x the value of the entire bitcoin network. ?
That’s a $ 17T bubble people bought into knowing they are guaranteed to lose money unless they sell it to a greater fool.
The definition of a ponzi scheme.
– Rhythm (@Rhythmtrader) October 17, 2019
Perhaps it is time for pension funds, banks and investors to have insurance against this negative return. Mark Yusko, CEO of Morgan Creek Capital Management, says the global bond market is a big bubble, and thinks that bitcoin offers the ultimate insurance.
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