Today’s bond market is defying just about every comparison known to man.
Never before have traders paid so much to own trillions of dollars in debt and gotten so little in return. Jack Malvey, one of the most-respected figures in the bond market, went back as far as 1871 and couldn’t find a time when global yields were even close to today’s lows. Bill Gross went even further, tweeting that they’re now the lowest in “500 years of recorded history.”
Lackluster global growth, negative interest rates and extraordinary buying from central banks have all kept government debt in demand, even as yields on more than $8 trillion of the bonds dip below zero. But as investors forgo any margin of safety to bid up prices higher and higher, the big worry is that the insatiable demand has blinded them to potential dangers that may result in painful losses -- especially as the Federal Reserve considers raising rates.
“This absolutely leaves the markets a lot more vulnerable,” said Torsten Slok, the chief international economist at Deutsche Bank AG.
Beyond the bubble of the bond market, history offers some clues. Ten-year U.S. government notes now yield less than stocks pay in dividends -- just the third time that’s happened in the past half-century. The last two times, Treasuries suffered their biggest annual losses on record.
The stakes couldn’t be higher. Average yields for 10-year notes in the U.S., Japan, Germany and the U.K., which have issued more than $25 trillion in government debt, fell to 0.69 percent last week, data compiled by Bank of New York Mellon Corp. showed. That’s the lowest on record and well below the 5 percent average over the course of 145 years.
With yields so low, bond buyers are leaving themselves no room for error. In the U.S., a metric known as the term premium now stands at minus 0.47 percentage point for 10-year notes. The measure, which the Fed uses as a tool in guiding monetary policy, reflects the extra compensation investors demand to hold longer-maturity debt instead of successive short-term securities.
As its name suggests, the term premium should normally be positive and has been for almost all of the past 50 years. But since the start of the year, the premium has turned into a discount, suggesting that bond investors can’t see any risks on the horizon that would push yields higher. The same is true in Japan, Germany and the U.K., where the term premium has gone negative as benchmark yields in all three markets hit all-time lows last week.
The “term premium should almost never be negative, but we’re in a new normal,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 23 dealers that trade directly with the Fed.
For the pessimists, there are plenty of reasons to keep paying up for the safety of government debt -- even at sky-high prices.