Sunday , May 16 2021
Home / Wall Street Journal /The Bizarro World Of Bonds Keeps Get More Bizarre

The Bizarro World Of Bonds Keeps Get More Bizarre

Summary:
By Richard Barley Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result. Monetary policy traditionally has involved adjusting a short-term rate of interest that can then, over time, affect the structure of long-term rates that are set by markets. But central banks’ bond purchases and ultralow interest rates mean that distortions are rife. Some ripples are having immediate impacts: the Bank of England’s new quantitative easing program, for instance, has turbocharged the U.K. bond market. The failure of the BOE to buy as many bonds as it wanted Tuesday pushed long-dated gilt yields to new historic lows: the 30-year yield, which three months ago was 2.3%, now stands at 1.3%. Gilts maturing in 25 years or more have returned an extraordinary 34.8% so far in 2016, according to Barclays. But the pernicious ripple effects from ultralow interest rates are more to do with their persistence. This is clearest perhaps in Germany, where the long decline in yields driven by the European Central Bank has produced a strange new breed of zero-coupon bonds. A traditional zero-coupon bond is sold at a deep discount to face value. Investors don’t get any interest payments, but the bond’s price should rise as it gets closer to maturity.

Topics:
Wall Street Journal considers the following as important:

This could be interesting, too:

David Stockman writes Chart Of The Day: How Trillion Of Uncle Sam’s Borrowings Went Missing

Fortune writes Five Things You Should Know About the Deutsche Bank Train Wreck

Marketwatch writes Yellen May Quit If Trump Wins—-Please Do!

Bloomberg Business writes 18-Wheeler Alert—-Heavy Truck Sales Down 29% Y/Y

By Richard Barley

The Bizarro World Of Bonds Keeps Get More Bizarre

Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.

Monetary policy traditionally has involved adjusting a short-term rate of interest that can then, over time, affect the structure of long-term rates that are set by markets. But central banks’ bond purchases and ultralow interest rates mean that distortions are rife.

Some ripples are having immediate impacts: the Bank of England’s new quantitative easing program, for instance, has turbocharged the U.K. bond market. The failure of the BOE to buy as many bonds as it wanted Tuesday pushed long-dated gilt yields to new historic lows: the 30-year yield, which three months ago was 2.3%, now stands at 1.3%. Gilts maturing in 25 years or more have returned an extraordinary 34.8% so far in 2016, according to Barclays.

The Bizarro World Of Bonds Keeps Get More Bizarre

But the pernicious ripple effects from ultralow interest rates are more to do with their persistence. This is clearest perhaps in Germany, where the long decline in yields driven by the European Central Bank has produced a strange new breed of zero-coupon bonds.

A traditional zero-coupon bond is sold at a deep discount to face value. Investors don’t get any interest payments, but the bond’s price should rise as it gets closer to maturity. In effect, buyers of such instruments opt to defer their interest payments and receive them all in one hit, along with their principal repayment. For instance, a Tradeweb calculator shows that a zero coupon 10-year bond yielding 3.5% would be priced at 70.9% of face value.

The Bizarro World Of Bonds Keeps Get More Bizarre
European Central Bank headquarters in Frankfurt. The long decline in yields driven by the European Central Bank has produced a strange new breed of zero-coupon bonds. PHOTO: REUTERS

Germany now has more than €160 billion of zero-coupon bonds in issue. All of its two-year notes pay no interest, along with three of its five-year notes; all of them trade above face value. Most remarkably, in July Germany issued a 10-year zero-coupon note at a price above par. Wednesday, it tapped that issue at an even higher price, and an even more negative yield. The longer rates stay at these levels, the more zero-coupon bonds there will be.

The crucial thing to understand is that these instruments are no longer bonds—at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.

Bonds are traditionally viewed as a haven. But the new world of bonds has never looked more risky.

Write to Richard Barley at [email protected]

Source: Bond Markets: Growing Ever More Bizarre

Wall Street Journal
The Wall Street Journal is a business-focused, English-language international daily newspaper based in New York City. The Journal is published six days a week by Dow Jones & Company, a division of News Corp, along with its Asian and European editions. The Wall Street Journal is the largest newspaper in the United States by circulation. According to the Alliance for Audited Media, the Journal had a circulation of about 2.4 million copies (including nearly 900,000 digital subscriptions), as of March 2013, compared with USA Today‍ '​s 1.7 million. The Wall Street Journal has won 39 Pulitzer Prizes through 2015 and derives its name from Wall Street in the heart of the Financial District of Lower Manhattan. The Journal has been printed continuously since its inception on July 8, 1889, by Charles Dow, Edward Jones, and Charles Bergstresser.

Leave a Reply

Your email address will not be published. Required fields are marked *