The negative yields on Government Bonds indicate a new forthcoming Recession

The colossal-scale quantitative easing program-colossal sized purchases of government bonds of Eurozone member countries by the ECB-implemented by the ECB during the mid-2010 have resulted in today’s government bonds of most Euro-area member countries and not only to turn to negative yields. But the most worrying fact is that these negative yields on the Eurozone government bonds will continue to exist for at least the next twelve months.

by Thanos S. Chonthrogiannis

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The situation of negative yields on government bonds and what marks

The two-month announcement (18/06/2019) by ECB President Mario Draghi on the possibility of implementing a new quantitative easing program in the Eurozone which is coupled with the raging trade war between the US and China, lead to the yields of government bonds in the Eurozone either to be permanently in a negative sign or to be altered between negative and positive sign.

The table below is indicative of what applies to yields in most of the government bonds in the Eurozone but also in other countries (Source: www.worldwidegovernmentbonds.com )

Recently the FED decided to reduce its base borrowing dollar rate after too many years. Deutsche Bank recently announced last week that there are currently worldwide government bonds worth $15 trillion that have negative yields.

So, given all this data, the investors are deciding to sell their shares and are constantly seeking safe shelters for their funds in government bonds. This is the main reason that due to the drastic increase in demand for government bonds, government bond yields are in a negative sign.

Investors have found that the main Central banks (e.g. ECB, Bank of Japan etc.)  they are not able to create technical inflationary pressures to trigger growth in their countries through the implementation of quantitative easing programs in their economies.

Looking at investor expectations for inflation through the 5-year forward inflation swaps, we find that investors are waiting in the short-term future low levels’ inflation. For example, today the current 5-year inflation expectation rate is 1.74 for the US, while for the Eurozone the corresponding inflation expectation is 0.9%.

So, given that inflation expectations for the coming years are very low, this shows that investors will not be able to demand higher yields from the government bonds. In fact, even more pressure is expected on the odds offered, due to a drastic increase in demand worldwide for government bonds.

Inflation is known to reduce the actual purchasing power of incomes and profits from future payments of all kinds of bonds (governmental and corporate). The higher the expectations for future inflation, the lower the prices of bonds (due to the drastic reduction in demand for them) which results in higher yields.

The state of the economies

On the other side of the Atlantic Ocean, the FED has a greater margin of movements than the ECB and the Bank of Japan, and since the return to the US 10-year government bond is 1.71%, while in the US 30-year government bond the yield is at 2.25%.

The greater the difference between the lending rates of the ECB and the FED central banks respectively, the higher the cost for investors to hedge themselves against any alterations in the US dollar.

In any case, there are objections to whether the FED will give in to the pressure of President Trump to implement a policy of reductions for its basic borrowing dollar rate, in order to develop the US economy and to “squeeze” further China through the trade and monetary warfare.

Currently the image of the US Federal government bond yield curve is reversed both in short-term maturation (5Y-2Y) and in medium-term maturation (10Y-5Y), while in long-term maturation track (30Y-10Y) the yield curve is almost flat.

Last week the performance of the US 10-year government bond (benchmark) declined below the performance levels of the US 2-year government bond. The spread (10y-2y) < 0 is negative and which prepays the upcoming recession in the US. That was the reason why the Dow Jones last week lost all of 800 units or -3.05% in a single session.

The yield curves of the government bonds of the countries of Germany, and Japan present the same image as the corresponding US yield curve. The German yield curve is anticipating the shrinking of the German economy due to its drastic decline in exports from the US-EU secret trade war.

The UK government’s gilts yield curve is in its entirety reversed, indicating that after 6 consecutive years of growth will enter a recession due to the anticipated decline of its GDP by Brexit.

Italy has all the economic elements that indicate recession. China is under-developed in relation to the growth rates of the past, gradually losing developmental momentum due to the trade war. If China’s annual growth rate is reduced to 5%, unemployment will be launched, and social problems will be created.

The impending recession and the causes of terror

1. The level of the total global debt is higher than the amount it had since 2008. In 2018 the total public debt was more than $65 trillion and compared to $37 trillion that was in 2008. At the same time, the total value of loans in the global economy for 2018 reaches $244 trillion. (Source: IIF).

2. The monetary policy of the Central banks is not enough to cope with the recession. They have exhausted all their “arsenal”.

3. Due to the trade and monetary wars, there is no need for concerted action in the horizon to tackle the impending recession.

The US is busy with China, while they disagree with the EU. The EU refuses to implement US policies (mainly in the Middle East) and is increasingly becoming more energy-efficient with Russia.

Russia, while its citizens each year have increasingly reduced purchasing power and increase their credits to cope with the problems of everyday life are looking at US actions. China is concerned with how to suppress protesters in Hong Kong and not how to find a solution with the United States.

The risk of recession is at the gates, and there is a global miscommunication.

Thanos S. Chonthrogiannis