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How to stop deflation

how to stop deflation


Markets reporter

NEW YORK (MarketWatch) — Negative government bond yields, which means that investors are paying to lend money to governments, aren't necessarily bad news, according to Russ Koesterich, BlackRock’s global chief investment strategist.

In fact, instead of “freaking out” – as Goldman Sachs’s No. 2 Gary Cohn, said in a TV interview last month – investors can actually profit from the fact that around 25% of the eurozone’s government bonds carry a negative yield.

Investors better start getting comfortable with the prospect of negative yielding debt with more countries headed in the direction. Indeed, on Wednesday Switzerland became the first country to ever issue 10-year debt carrying a yield less than zero.

Here’s how to rethink negative-yielding bonds, according to Koesterich :

First, negative yields may make sense if you expect a significant decline in prices. Since the eurozone is flirting with deflation. real or inflation-adjusted yields could actually be a positive even if nominal yields are negative.

Second, although yields may become even more

negative, bond prices will appreciate and investors can potentially make a profit from buying and selling before the debt matures.

Bond prices move inversely to yields.

Once higher-quality bonds, such as the German bunds, hit the negative 0.2% mark, the European Central Bank, which is carrying out its ambitious stimulus program, which includes purchasing eurozone bonds,will have no choice but to keep buying other eurozone countries’ bonds. The ECB’s moves will send German bond yields moving toward negative territory as well, said Tom di Galoma, head of rates-and-credit trading at ED & F Man Capital Markets.

Outside of the Switzerland, Germany, France, the Netherlands, Belgium, Ireland and Austria already have all their short-term debt trading with yields at less than zero in the secondary market.

And even in negative territory, investors are eager to buy, as the Spanish negative yielding short-term debt issuance showed on Tuesday.

In this context, jumping on the negative-yield bandwagon might actually be a strategic move as Switzerland’s move might suggest.

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