What Do Negative Bond Yields Mean for the Gold Price?

Those in the gold space will likely remember that Switzerland was in the spotlight last fall, when the country was set to vote on whether the Swiss National Bank should be forced to rebuild its gold stockpiles. 

Some analysts believed a “yes” vote might provide some support for the gold price, which spent November, the month of the vote, trading between about $1,170 and $1,200 per ounce.

Ultimately, however, those on the “no” side prevailed, with gold taking a $20 hit on the news. Though it was able to recover that loss fairly quickly, some market participants were disappointed to learn that the yellow metal would not be gaining support from extended gold buying from the Swiss National Bank.

The country was in the news again in January when it surprised the world by removing the cap on the franc’s value against the euro, a move that ultimately led to a jump in the franc.

Since then, Switzerland has been less of talking point in the gold space. However, that changed Wednesday when news surfaced that the European nation has become the first country to sell 10-year government bonds with a negative yield. According to Reuters, in layman’s terms that means the Swiss government “has effectively made investors pay for the privilege of lending to it for such a long period.”

Switzerland’s milestone move

In terms of what exactly the government did, the news outlet notes that it sold bonds worth 232.501 million Swiss francs ($242 million) at a yield of -0.055 percent. They carry a 1.5-percent interest rate and will mature in July 2025. The bonds were last auctioned in February and sold at what was at the time a record low yield of 0.011 percent.

While the process might sound outrageous to some, Reuters points out that negative yields aren’t unheard of — it’s the fact that the bonds will take 10 years to mature that’s surprising. As the news outlet points out, “euro zone benchmark German debt trades in the secondary market with negative yields on maturities of up to seven years.” Furthermore, Berlin has auctioned two- and five-year bonds at negative yields.

Meanwhile, the Financial Times states that “[b]onds with negative yields have become one of the world’s fastest growing asset classes, accounting for around a quarter of Europe’s government debt market.”

Such sales are becoming widespread in part because investors lack faith in the economy. As Jeffrey Sica, chief investment officer of Circle Squared Alternative Investments in the US, told The Wall Street Journal, “[t]he combination of deflationary fears and aggressive central-bank action has caused investors to accept the reality of negative-yield bonds.” He added that auctions with negative yields show “a lack of confidence from investors that the economy will be growing in the short term.”

Similarly, Salman Ahmed, global fixed-income strategist at Lombard Odier Investment Managers told the Journal, “[g]iven the prospect of sustained monetary policy easing by the ECB for the foreseeable future, issuing long-term paper denominated in euros makes sense from a borrower’s perspective. We expect this trend to strengthen.”

Investor impact

Even so, those statements don’t explain why investors would buy such bonds. Taking a stab at answering that question, Russ Koesterich, global chief investment strategist at investment firm BlackRock, said that there are two reasons investors might be interested in paying to lend money:

1. For one, “negative yields may make sense of you expect a significant decline in prices,” he states in a recent article. Essentially, the idea is that in a deflationary scenario “real (or inflation-adjusted) yields could be positive even if nominal yields are negative.” 
2. Secondly, he notes, “yields may become even more negative, which allows for profit potential for those willing to sell before maturity.”

Illustrating the situation a little more bluntly, Business Insider points out that the Swiss National Bank’s overnight deposit rate is -0.75 percent, meaning that by taking the -0.055-percent yield offered by the bonds investors will lose “a little bit less money than [they] would by parking that money in a bank.”

Of course, for gold-focused investors the real question is what all that means for the metal’s price. Unfortunately, there’s no simple answer. That said, a comment made to the Financial Times by Steven Major, global head of fixed income research at HSBC, provides an interesting perspective. He told the publication, “[w]e have unconventional central bank policies at work so you have to expect unconventional outcomes. One is that bonds are no longer trading like bonds. They now trade like commodities — with investors speculating on the price.”

Given that investors often buy gold and other precious metals as a hedge against risk — for instance, when the economy is doing poorly — it will be interesting to see whether this new way bonds are being traded has any impact on interest in such metals.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Infographic: What You Need to Know About Switzerland’s Gold Referendum

Survey: Switzerland Looks to Vote on Future of Gold

Gold Drops $20 on Swiss ‘No’ Opinion Poll, Edges Back Towards $1,200