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Negative real borrowing costs add fuel to markets that are already on fire, limiting the downward pressure on bonds, keeping corporate spreads on the tight side and pushing stocks to new high after new high. [...]

For investors, it’s a chicken and egg scenario. They’re crying out for policy “normalization” - higher rates and less central bank “interference” in markets - but are enjoying the asset price boom that’s in large part a direct consequence of central bank largesse.

E.g. news from July this year:

Greece is scheduled to end nearly a decade of external help this August, after implementing more than 400 policy measures demanded by creditors. The yield on the 10-year government bond has fallen about 30 basis points in the wake of the recent debt deal. It moved from standing at about 4.2 percent to 3.9 percent. In contrast, Italy’s 10-year yield currently stands at 2.668 percent and the U.S.’ at 2.85 percent.

Negative real borrowing costs add fuel to markets that are already on fire, limiting the downward pressure on bonds, keeping corporate spreads on the tight side and pushing stocks to new high after new high. [...]

For investors, it’s a chicken and egg scenario. They’re crying out for policy “normalization” - higher rates and less central bank “interference” in markets - but are enjoying the asset price boom that’s in large part a direct consequence of central bank largesse.

E.g. news from July this year:

Greece is scheduled to end nearly a decade of external help this August, after implementing more than 400 policy measures demanded by creditors. The yield on the 10-year government bond has fallen about 30 basis points in the wake of the recent debt deal. It moved from standing at about 4.2 percent to 3.9 percent. In contrast, Italy’s 10-year yield currently stands at 2.668 percent and the U.S.’ at 2.85 percent.

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Although this year the bond rates are expected to tighten, they are still mostly negative in real terms (for the big boys, but not so much for the smaller fish with weaker economies; the exception being the US which slighly above zero):

enter image description here

Countries whose debt is denominated in a foreign currency, or a currency they can't print for some other reason, e.g. being in monetary union (ahem, Greece) can be in a world of hurt if they suddenly are threatened by default (inability to pay back on schedule). Typically the IMF steps in but it also imposes conditions in terms of structural reforms etc. for their bailouts.

Countries whose debt is denominated in a foreign currency, or a currency they can't print for some other reason, e.g. being in monetary union (ahem, Greece) can be in a world of hurt if they suddenly are threatened by default (inability to pay back on schedule). Typically the IMF steps in but it also imposes conditions in terms of structural reforms etc. for their bailouts.

Although this year the bond rates are expected to tighten, they are still mostly negative in real terms (for the big boys, but not so much for the smaller fish with weaker economies; the exception being the US which slighly above zero):

enter image description here

Countries whose debt is denominated in a foreign currency, or a currency they can't print for some other reason, e.g. being in monetary union (ahem, Greece) can be in a world of hurt if they suddenly are threatened by default (inability to pay back on schedule). Typically the IMF steps in but it also imposes conditions in terms of structural reforms etc. for their bailouts.

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It depends on the country. Countries whose currency is attractive enough, e.g. the US dollar can "get away with it" by "printing" more money (see quantitative easing), although they can't do that too fast because that can cause inflation. The bonds of the big countries have had somewhat of "miraculous" negative real interest rate in the short run recently (although lacking a pretty graph):

UK national debt is currently issued at a yield of less than 1% – far below the rate of inflation (2.6% in July). And this means Britain can effectively raise money free of charge in real terms. [...]

So why are UK bonds still flying off the shelves, allowing the government to plug the gap in its spending plans with virtually “free” money? It is possible that investors are snapping-up new gilts simply through a lack of alternatives. If (as some fear) overpriced stock markets and property are about to crash and once-buoyant emerging markets are in trouble then the public debt of stable rich countries becomes the least worst option. US and German debt issues are proving similarly popular at rock-bottom yields.

It depends on the country. Countries whose currency is attractive enough, e.g. the US dollar can "get away with it" by "printing" more money (see quantitative easing), although they can't do that too fast because that can cause inflation.

It depends on the country. Countries whose currency is attractive enough, e.g. the US dollar can "get away with it" by "printing" more money (see quantitative easing), although they can't do that too fast because that can cause inflation. The bonds of the big countries have had somewhat of "miraculous" negative real interest rate in the short run recently (although lacking a pretty graph):

UK national debt is currently issued at a yield of less than 1% – far below the rate of inflation (2.6% in July). And this means Britain can effectively raise money free of charge in real terms. [...]

So why are UK bonds still flying off the shelves, allowing the government to plug the gap in its spending plans with virtually “free” money? It is possible that investors are snapping-up new gilts simply through a lack of alternatives. If (as some fear) overpriced stock markets and property are about to crash and once-buoyant emerging markets are in trouble then the public debt of stable rich countries becomes the least worst option. US and German debt issues are proving similarly popular at rock-bottom yields.

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