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Over the past
few months Germany, Switzerland and the US have sold bonds with negative
yields, meaning that investors are in effect paying those countries to
safeguard their capital.
Yesterday the
sub-zero club admitted a fourth member:
France
sells bonds at negative interest rate
PARIS -
France's government has sold short-term bonds at negative interest rates for
the first time, a sign of investor confidence despite concerns about French
debts and the wider eurozone.
Despite the
dropping rates, France's economic outlook is stagnant. President Francois Hollande said Monday that growth in the first half of
this year is expected to be "nil."
Yields, or
borrowing rates, have been falling on French medium and long-term bonds in
auctions over the past couple of months, as investors flock to the perceived
safety of Europe's larger economies.
In a sale
Monday, the treasury sold three-month bonds at -0.005 percent, and six-month
bonds at -0.006 percent. The treasury agency says it's the first time they
have registered negative yields
Some thoughts
It's easy to
understand Swiss, German, or even US bonds trading with negative yields. But
French bonds? After the country elects a Socialist who promises to increase
government spending and raise marginal tax rates to 75%? This is a truly
desperate world, and these bonds are safe havens only in the most short-term
sense.
Consider the
economic impact of negative interest rates: Capital parked in these bonds
actually shrinks over time, so its contribution to economic growth is negative.
A nation's GDP contracts if its money earns a negative yield, which puts the
government in an even deeper hole that requires even more borrowing, ad,
apparently, infinitum.
For gold the
implications of this trend towards sub-zero interest rates are mixed. On the
one hand, the rap against gold has always been that it doesn't pay interest.
But with the safest fiat currency bonds actually costing money to own, gold's
zero yield looks relatively good. On the other hand, the reason that rates
are falling so precipitously is that vast sections of the global financial
system are imploding, which is profoundly deflationary. On yet another hand,
the major central banks will inevitably react with money creation the likes
of which John Maynard Keynes could only have dreamed of, which is obviously
inflationary. Add it all up and gold's story is the same as it's been for a
decade: lots of twists and turns but wildly bullish in the end.
The idea of
paying someone to hold our money harkens back to the origins of banking, when
goldsmiths offered to warehouse customer coins and bullion for a fee. Could
this be the beginning of the end of fractional reserve banking? Future
historians take note.
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