Although people’s faith in government may be called into question by global events like acts of terrorism, the refugee crisis, the Brexit vote, and the raucous 2016 American presidential campaign, markets show investors’ faith in government institutions remains intact. In fact, investors are divesting financial anxiety about the recent social and political disquiet by buying government bonds at a higher price, thus lowering the interest rate and decreasing yield.

According to Bloomberg, “If low interest rates on sovereign debts are the ultimate measure of confidence in the governments that issue them, the market remains unshaken.”

To many investors, buying government debt seems like the smart move, because they stand to lose less than they expect to otherwise. If this trend continues, and bond prices continue to climb, investors could actually earn money by selling their bonds amongst themselves for a higher price than what they paid.

Investors’ reaction to the recent global unrest reverses a trend that goes back at least 30 years. Bonds are usually expected to make money for investors, and historically, they have done just that. According to Bloomberg’s data, investing in government debt could be considered more profitable than investing in gold: “During the past 30 years, global sovereign debt returned 576 percent, or more than twice the 271 percent return for gold, while U.S. Treasury securities returned 529 percent, according to Bloomberg data. The yield on the 10-year Treasury note, which climbed to a high of 15.8 percent in 1981, is 1.3 percent this month, the lowest since Bloomberg began compiling such data in 1962.”

Based on data from Citi, Quartz reported that a third of all developed countries now return negative yields on investments. Negative yields aren’t new, especially when it comes to shorter-term bonds. But as of early July, Germany and Japan offered 10- and 15-year bonds with negative yields. As Slate put it, “investors paid for privilege of lending Berlin money for an entire decade. If someone were to purchase and hold these bonds to maturity, they would get back less cash than they originally invested.” Switzerland made history when its 50-year bond yields turned negative. Again, Slate sums it up: “Investors are now expected to pay for the privilege of lending money to the Swiss for a half-century at a time.”

The drop to single digit, or even negative interest rates signals a dip that many economists identify as part of a larger phenomenon called “secular stagnation,” marked by diminishing population growth, not enough capital investment, and inadequate advances in technology. By buying long-term bonds at a loss, investors are also essentially casting a vote against inflation, which can be an indicator of global growth. They may even expect deflation. Additionally, low interest rates pose a challenge for banks trying to make a profit, and for central banks should they try to raise the interest rate.

Though all this seems to signal a pessimistic economic outlook–a vote of no confidence–investors may actually be bankrolling a better future: investors’ loss could be government’s gain. Governments can take advantage of low interest rates to borrow money and kick off infrastructure projects at the lowest cost in decades.

“So far in the 21st century, the bonds sold to finance roads, bridges, hospitals, sewers and schools have outperformed all state and local government debt as well as the stock market and even gold, according to Bloomberg data.” Shoring up America’s ailing infrastructure will only strengthen the economy, job market, and global market, as well as improving the nation’s future. If other governments embark on similar projects and originate new endeavors, we could secure a more positive outlook.

 

2017-06-19T15:02:35+00:00 August 5th, 2016|Blog, Economy, Finance|0 Comments

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