$3tn in negative-yielding eurobonds are a time bomb so buy gold!

Posted on 29 April 2015 with 1 comment from readers

The $3 trillion worth of eurobonds now with negative yields – that means their owners are actually paying to hold them – are a time bomb for the global financial system and will destroy the savings of pensioners as rapidly as they crash hedge funds.

This extraordinary phenomenon puts the world’s second most widely-traded currency on the path to the biggest mass default in history, according to Jeremy Warner writing in The Daily Telegraph today.

Negative-yielding bonds

Investments on bonds are primarily made to ensure that the bondholder receives good returns on the principal that are linked here. However, when the holder of a particular set of bonds loses a significant amount of money on the investment, then the bonds are said to have a negative yield. The extent of the negative yield will largely depend upon the yield type that has been used for yield calculation.

Seventy per cent of German bunds now trade on a negative yield while in France it’s 50 per cent and even in Spain it’s 17 per cent despite this country being virtually bankrupt a few years back. How long can this go on?

It is clearly utter madness to hold an investment that costs you money to hold. It is a guaranteed loser. Money printing via quantitative easing is to blame and QE is having the reverse of the intended effect.

Rather than encouraging investors to go into high risk assets they have become afraid of the lofty and artificial valuations created by low interest rates. By comparison bonds seem to offer lower risk to capital even if that insurance actually costs you money, though not if they default.

‘Sickening losses’

Mr. Warner professes himself baffled by what the endgame will be except to say: ‘The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses.’

Unfortunately it is not good enough to throw your hands in the air and exclaim: ‘What comes next is anybody’s guess’ as does Mr. Warner in his column today.

Investors need to start taking protection now against this blow-up in global financial markets which is inevitably going to be the round two of the Global Financial Crisis of 2008-9. With hindsight there were plenty of warnings of the GFC from the likes of Nouriel Roubini and others who understood the housing subprime loans debacle.

Subprime part 2?

This time the negative yields on eurobonds are the canary singing loudly in the coal mine. Hard assets are the way to survive in this next crisis.

That means any sort of real estate without debt, works of art, land and gold and silver. Paper or financial assets like bonds and fiat currency will suffer horrible real devaluations in the next crisis that will be permanent readjustments.

Think back to the post-USSR Russia of the 1990s and how the ruble was devalued to nothing while apartments kept their value and so did precious metals and art. This is about to happen again but on a much bigger scale. Take heed and take action!