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Stocks are falling on concerns over European banks, the plunging price of oil and the first-ever negative Japan 10-year bond yield this week. How can traders play the global march to negative yields and the rising volatility?
Federal Reserve Chair Janet Yellen attempted to reassure the market as she reported to the Senate Banking Committee on Thursday, a day after a session with the House Financial Services Committee. In her speech Wednesday, she stated the Fed is closely watching the global financial market turmoil and said it could delay the future path of rate hikes if it hurts the economy.
However, investors are worrying that loose central bank policies have finally gone too far as bond yields are reaching unprecedented levels.
Japan on Tuesday became the first G-7 country whose 10-year debt went past zero, which means holders are actually paying the government for the privilege of lending it money. And the U.S. 10-year Treasury yield is falling precipitously, declining to 1.53 percent Thursday morning, the lowest level since August 2012.
CNBC Pro asked top Wall Street strategists and money managers how investors should position their portfolios in the global march to negative bond yields.
For shorter maturities, this trend of negative yielding debt has been around for a while. Societe Generale estimates that global negative yielding debt of all durations has increased to $7 trillion from $2.6 trillion a year ago.
"(Central banker) plan worked for a while, but it has now failed. Investors are hoarding capital and taking a defensive stance. Negative rates have weakened the European and Japanese banking system," BKCM's Brian Kelly wrote in an email earlier this week. "What should investors do? Exercise extreme caution until markets digest the loss of confidence in central bankers."
And others agreed this is a bad signal for most assets.
"Negative rates are a sham. Pricing and policies are manufactured in a vacuum," Old Blackheath's Jeremy Hill said in an email. "For global risk assets this likely means that gains made in the now will be repaid via higher volatility in the future. That keeps money at bay and complicates all risk management models."
All isn't lost however, as investors do believe there are opportunities to make money in this uncertain environment.
"It's hard to find decent risk-to-reward propositions right now, but for the credit inclined, select (corporate) investment-grade bonds look attractive and for equity investors self-help or meditation books are easy enough to source," Hill added.