Negatively yielding debt is an unusual situation.
It means investors effectively pay interest to the borrower to own the debt rather than the other way around, as you would pay a normal loan.
In a sensible world this makes no sense for any investor; and yet the amount of negatively yielding US dollar debt recently hit a record high at $15.5 trillion, according to the Bloomberg Barclays Global Aggregate universe.
Around the same time the price of gold hit a six-year high of $1,550.
The chart that caught the eye of the Schroders’ Multi-Asset Investment team this month is below. It shows the positive connection between the total value of negatively-yielding debt in US dollars and the gold price (in USD per ounce).
What is happening?
Concerns are rising over the health of the global economy. Growth indicators are deteriorating, trade tensions are escalating and central banks are moving towards an easing bias.
The Federal Reserve recently cut interest rates, for instance. It’s a sign that the US central bank thinks it needs to make money cheaper to borrow to keep people spending to boost the economy.
Markets are also bracing themselves for a potential downturn. The prices of proxies for industrial health, such as copper and oil, have been falling. And investors are flocking towards assets perceived as safe havens such as gold and bonds.
Why is the gold price rising?
Gold tends to retain its value because of its relative scarcity and physical form.
It is a valuable commodity for investors hoping to protect the their wealth during an economic downturn.
Why are debt yields falling?
Likewise, the debt (bonds) of companies and governments that can be relied on to repay the money they borrow are also attractive. They are perceived as less risky as the likelihood of them being unable to repay the loan is low.
The more demand there is for bonds, the more the price of debt rises, which causes bond yields (the percentage of interest payments) to fall. Investors are more willing to accept negative bond yields if it means preserving their wealth compared to potential losses in riskier investments like stocks.
Could gold become the more attractive option?
The demand for safety is causing the amount of negative yielding debt to rise together with the gold price.
Gold on its own looks unappealing for the sensible investor; it pays no yield (interest) after all. The only way to make a return on gold is if its price rises.
But if investors want to be rewarded in yield for buying safe assets like bonds they are fast running out of options, given the fast growth of negative yielding debt. Gold, with zero yield, increasingly looks attractive in this difficult environment for investors looking for safety.
We on the Schroders’ Multi-Asset Investment team are positive on gold given its safe haven characteristics as part of a broader mixed portfolio.