Problem for investors & home owners, maybe?

Some experts are now looking at a possible future financial ‘Supernova’ raising its head on the horizon. It would appear the bond markets are hiding a potential new monetary crash with bonds (government and corporate debt) now estimated to be US$10 trillion all with negative yield.

Low and negative yields are a problem for investors that rely on government debt to generate returns. It is widely held by pension funds, insurance companies, banks and many other investment organisations that seek low risk assets.

The low return on these bonds is one of the reasons some pension funds have deficits.

The low central bank interest rates have squeezed banks profitability. Where there are negative rates, it generally applies to some of the reserves they hold with the central bank, it costs them money. They are reluctant to compensate themselves by imposing negative rates on customers’ savings accounts. Australian banks are not in that position yet but the reserve is heading to lower rates.

Low interest rates make banks less profitable and it is fair to say they will make credit less available and will ultimately lead to banks increasing rates for existing customers in the long term.

The real issue is the price of a bond and the yield move in opposite directions. So if those negative yields turned sharply upwards, above zero, their prices would fall and the bondholders would lose.

So you see the issue of US 10 trillion in zero or negative yield bonds, if the yields were to move sharply upwards the bond prices would fall and if you are holding some of the $10 trillion you are going to be in trouble. You have the same scenario of the American property crash with debt (mortgages) being of loaded.

This may have something to do with the recent ‘Supernova’ tweet which appeared from Bill Gross, founder of Pimco who now works at Janus.

Goldman Sachs has warned that any upward move in interest rates of one percent or more would see bond holders seeing losses of around US $1 trillion.

This all does not bode well for the Mum & Dad property owner and the investment market as a whole as it would appear the potential for a property and investment market shock are still out there.