This morning I got myself analyzing the Swiss yield curve and I was stunned with the yield movement from the last 12 months. I started wondering what will this curve be like in the next 12 months, so drew a red line on the graph that simulates how low can yields reach if they continue this same insane trend.
1) The Swiss investors have to go as far out as 8 years maturity to see a positive return
2) The 2 year yield around – 0.45% is the lowest yield EVER recorded
3) Today’s yield curve is the lowest curve the world has EVER seen (across any maturity)
4) If yields evolved the next 12 months as they did the last 12 months, the Swiss government may get paid to borrow for up to 40 years
Does this world make sense to you? Well, yes and no. No because if someone had told me 5 years ago that government bond yields would be where they are, I’d have thought “impossible”. I find amazing how markets seem to be sedated into believing this is just the new normal. I mean, is it normal to lend 100 CHF to the Swiss government today and receive 99.55 in 2017? I don’t think so. On the other hand this does make sense as it’s the only way to keep today’s broken system alive. I can only see 3 ways to get us out of this mess. One is Growth and that one seems out of reach – even the IMF recently dropped their projections for the world’s GDP growth to a mere 3%. Second is Inflation, but central banks are failing to achieve this – we are in a structural deleveraging process and this will probably last for another 1-2 years (at least). All the money printed is staying in the bond/equity/RE markets, it’s not filtering through the economy. (not to mention the velocity is money which is also dropping fast). So I can’t see inflation being the rescuer.. So negative rates seem to be the only way out for bankrupt governments to ever be able to pay back their monstruous debts – borrow at negative rates, essentially getting paid to borrow. Can you imagine lending 100 EUR today to the Portuguese, Spanish, Italian governments and receiving 99.50 in 2020? I’m afraid that’s where we are heading to – paying bankrupt governments to keep our money. This will not end well!!