The Rise Of Negative Interest Assets

An article buried deep in the Weekend Financial Times reports that the total of public bonds bearing negative yields has now passed US $ 10 trillion.  I have made an effort to check on the current global  size of such issues. I found a 2012 number that put it at 56 trillion, so maybe this number has now risen to 70 trillion of higher.  But I am sure it is still well below 100 trillion.  So, this total of negative yield public bonds is well over 10%, whatever precisely it is.  It is now a non-trivial portion of the total.

The article also reported that there is also a noticeable, if  much smaller, amount of privately issued such bonds, now at about US $ 380 billion.  This is certainly a miniscule portion of those bonds, but most people probably think that this total is zero or barely above. 

I am one of those who early on became aware that we might have nominal negative interest rates (as well as negative prices) with these first appearing momentarily publicly in the mid-1990s in Japan, even as the vast majority of economists declared such a phenomenon to be impossible.  As a a matter of fact I know that the federal funds rate went negative during intra-day trading on Dec. 31, 1986, the last day of the old tax code prior to the implementation of the Reagan tax simplification.  The rate also went as high as 18% during that day of wild trading, obviously an extreme case.  I have this from the person who handled Fannie Mae's trading account with the Fed and is not public informiation.  But it happened.

I have been someone not all that bothered by this phenomenon and have even welcomed moves by central banks to use them.  However, I confess that seeing a rising portion of public assets bearing such negative yields, I  become concerned about longer run if this continues.  Yes, boring annuities and insurance companies and such entities, and all that, but they have trouble doing what they are supposed to  do if there are not some positive interest rate assets around out there.  I imagine that the vast majority will  remain positive, so probably this is not a big deal.  If the world economy will just get growing more solidly, these negative yield bonds will  disappear, and I am not a fan of  some of parts of the insurance industry, such as the US health care part.  But if in fact positive yield bonds become scarce, there will be a lot  of things society will  have to do, such as taking over  insuring against fire, theft, and many other things.  This is probably silly paranoia, but then I was aware of the reality of negative interest rates long before most thought such were even remotely possible.

Barkley Rosser.