Fixed Income

Negative yields 'new normal' in Europe: Goldman


Yields on sovereign bonds in Europe have edged so close towards negative territory this year that U.S. investment bank Goldman Sachs has called it the "new normal" in the region.

Over 2 trillion euros ($2.1 trillion) of outstanding euro zone sovereign debt now has a negative yield, according to calculations by the bank.

This means that investors with these assets are effectively paying for the privilege to hold what many see as a "safe haven" instrument, hoping that someone else will be willing to pay more for the asset in the future, rather than it expiring and them losing money.

Switzerland - which is not part of the euro zone - became the first government in history to sell a benchmark 10-year sovereign bond at negative interest rates last week, according to the Financial Times. Germany looks likely to be the first euro zone country to follow suit, with yields at record lows. Its 10-year crept to 0.14 percent Tuesday morning.

Analysts and economists have spent months debating the issues surrounding negative yields and how they may be distorting markets. It is widely thought that quantitative easing by the European Central Bank (ECB) – which sees it purchase bonds in secondary markets - has accentuated the move.

The team at Goldman Sachs, led by Francesco Garzarelli, said in a note Tuesday that possible "collateral damage" from low long-term yields could be the solvency positions of German pension and insurance companies, which are the traditional buyers of these assets.

"(This) will be dealt (with) by the local regulator and, eventually, the fiscal authorities, but (will) not lead the ECB to moderate the overall pace of asset purchases," Garzarelli said in the note. He added that the ECB would only alter its portfolio purchases away from German bonds in the event of extreme dislocations.

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Nobel Prize-winning economist Robert Shiller has previously told CNBC that concerns over technology and future employment opportunities have forced people to invest in the safe haven assets.

"They are worried about their future. They are worried not just about next year, they are worried about the next twenty years, the next forty years. So they are desperately trying to provide for that, they'll even accept negative yields," he told CNBC in January.

The Bank for International Settlements also warned last month that negative bond yields could have damaging consequences for the public as well as financial institutions. It suggested that people could end up working longer to make up for shortfalls in their pensions.