Dead Meat in Jackson Hole
The Pointlessness of Negative Yields
If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.
Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]
Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration. The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on. In fact, negative interest rates undermine the foundational business model of banking in general.
How can banks lend money if they’re not compensated for the risk that some loans will go bad? And if banks can only lend money at a loss, why lend money at all? If there is no profit motive, what is the point?
There is currently about $17 trillion in combined government and corporate negative yielding debt in existence. The European Central Bank and the Bank of Japan, with policies of mass money debasement that far exceed those of the Federal Reserve, are the primary culprits. Their fake money and fake interest rates have produced fake capital markets.
In effect, Negative Interest Rate Policy (NIRP) destroys a commercial banks ability to build capital and offset losses. In other words, NIRP destroys commercial banks. By extension, NIRP via central banks leads to the implied nationalization of commercial banks.
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