GIC Board Member, J Paul Horne’s report on European and Japanese government bonds was published by The Financial Times and is used with permission.

The FT’s reporting focuses on growing investor concerns about high equity market valuations, slowing economic growth, real estate and corporate debt bubbles. But there is curiously little about what may be the biggest bubble of all: the estimated $11tn in “safe” European and Japanese government bonds with negative yields.

The bubble is clearly expanding in Europe as the ECB confirms it is ready for round two of “whatever it takes” to assure growth (June 19). Not only has the German 10-year Bund yield dropped to a record negative 32 basis points but its French OAT counterpart shows a negative yield for the first time.

It must be a fairly dire outlook to persuade investors to pay eurozone governments to hold their capital even as there must be doubt about Bunds and French OATs being the “safest” of investments at today’s prices. If the ECB succeeds in stimulating growth and pushing the inflation rate towards its 2 per cent target, yields will turn positive, meaning large losses for investors who bought negative yield bonds. But a further rise in negative yield bond prices would suggest recession is on its way with negative consequences for overpriced equity markets. That in turn could cause more capital to flow from equities into government bonds causing yields to turn even more negative.

Of course, the patient investor who bought a negative yield Bund could wait until the bond is paid off at 100.

Click here to view Horne’s letter in The Financial Times.

This blog post is a part of the College of Central Bankers blog series.