Will negative yielding bonds cause next financial crisis?

Added 8th September 2016

Sanofi and Henkel have faced a fair amount of derision from commentators this week having both issued negative yielding corporate bonds, but could this be a sign or major troubles to come in fixed income markets?

Will negative yielding bonds cause next financial crisis?

The only reason it seems that investors would be interested in buying such bonds would be if they hold expectations of interest rates becoming even more negative.

Franklin Templeton’s Dr Mark Mobius has waded in on the issue of negative government bond rates, suggesting that such policies are not creating the positive results that central banks had hoped for, shrinking bank profit margins and thus making them reluctant to lend.

He even goes as far to suggest another financial crisis could be on the horizon: “Many pension funds are in trouble since the safety they sought from government bonds normally held in their portfolios has not been earning any yield to speak of, and some are forecasting they will not be able to meet their obligations to pensioners in this prolonged low-rate environment.

“The result is a search for yield among those institutional investors, leading them to more toward risky bonds and equities. This, some observers fear, could lead to another financial market bust if the risky investments come home to roost.”

From a fund picker’s perspective, Robert Burdett, co-head of F&C Multi-Manager Solutions at BMO Global Asset Management, says he and his team have been doing much “soul searching” over duration positioning in their portfolios.

"The only reason it seems that investors would be interested in buying negative rate bonds would be if they hold expectations of interest rates becoming even more negative."

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Gary Shepherd

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Portfolio Adviser

Gary joined Last Word Media in 2009, becoming editor of Portfolio Adviser a year later. Previously, he worked at Incisive Media with roles across its Professional Adviser, Investment Week, Bloomberg Money and Mortgage Solutions titles. Gary has been shortlisted for various awards, winning Headline Money Investment Writer of the Year in 2010.

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