When I first realized that negative-yielding government of Canada bonds was a distinct possibility, I pictured investor riots. With so many Canadians close to retirement and desperate for steady income streams, a scenario where buyers were forced to lock themselves into an eventual loss of capital when buying a bond is a novel and alarming event.
I’ve become more, but not entirely, comfortable with the idea of negative bond yields. In Europe, where the majority of the US$15-trillion in negatively-yielding fixed income trades, the financial system has yet to show signs of serious strain. This is despite the fact that banks like Union Bank of Switzerland have not only stopped paying interest on client funds held in savings accounts, they are charging fees to hold deposits.
Joe Weisenthal from Business Week furthered the discussion in a column last week arguing that negative yields and negative savings rate are a logical consequence of current market and economic conditions. Mr. Weisenthal wrote, “When you log into your bank and see that you have $10,000 in your savings account, what that means is that your bank owes you $10,000. And where does the bank get the money to pay you? From the entities that owe the bank money … Thanks to ever-increasing wealth concentration and meagre growth across the developed world, you have some people sitting on incredible piles of cash and a shortage of people with robust opportunities to borrow and use that cash.”
The problem in essence is that there is a current oversupply of savings. From a bank’s perspective, they can’t pay an interest rate on customer deposits if there’s little demand for loans on which the bank can charge interest.
Where government bonds are concerned, the oversupply of savings has created such enormous demand for safe assets like bonds that the investor rewards for buying them have steadily declined.
One solution to the savings glut is for governments to go on a massive borrowing spree and issue trillions of dollars in new bonds. Most developed world governments are already struggling with high debt levels however, and this makes a debt binge a politically impossible option.
Investors could also decide, en masse, to accept higher portfolio risk levels by ignoring bond markets and diverting savings into the equity market. This potential trend would drive stock prices significantly higher but if earnings growth didn’t follow suit, equities would trade at prohibitively expensive price to earnings level very quickly.
The ‘excess savings’ explanation for negative bond yields and deposit rates seems reasonable but it still feels absurd that investors are buying assets with a guaranteed loss of capital.
Canadian investors don’t yet have to worry about negative yields on government of Canada bonds. But the longer the global savings glut continues, the more global bond funds will buy domestic and U.S. bonds, driving yields steadily towards zero.
–Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Charlotte’s Web Holdings Inc. (CWEB-T). This is a growth stock that appeared on the positive breakouts list (stocks with positive price momentum) earlier this month. Year-to-date, the share price is up 78 per cent. There are six analysts that actively cover this company and all have “buy” recommendations. On Wednesday, the company will be reporting its second-quarter earnings results. Charlotte’s Web produces, manufactures and markets hemp-based CBD (cannabidiol) products including CBD liquid products, capsules, topicals and products for pets. Jennifer Dowty profiles the stock (for subscribers).
The Rundown
Investors, be as liquid as possible. These are truly historic and dangerous times
We are living in dangerous times. Mostly, everyone David Rosenberg speak to lives in the here and now. They seem more interested in telling people how crazy cheap the stock market is and how crazy expensive the Treasury market is, rather than trying to look at the current environment in a historical perspective. We are living through a period of history that will be written about in textbooks in years and decades to come, and the undertones are none too good. Rosenberg says now is the time to stay with safer, liquid investments because the parallels to the 1930s - in both markets and society - are frightful. (For subscribers)
How to earn $52,000 tax free – no offshore account required
Interested in making tens of thousands of dollars a year without paying any tax? Sure, you could open a Swiss bank account or stash your funds in the Cayman Islands. But say you want to keep everything on the up and up and don’t relish the thought of doing jail time. John Heinzl shows investors a perfectly legal way to earn more than $50,000 a year without paying a dime to the Canada Revenue Agency. The secret? Invest in dividend stocks. (For subscribers).
Canada’s big banks are turning to Big Data for help in stock picking
Some of Canada’s big banks are turning to Big Data to try to rejuvenate their capital markets research departments, using tools most commonly associated with quantitative hedge funds. Advanced analytics, such as satellite-image intelligence, consumer trends gleaned from web scraping and investor sentiment indicators pulled from social media, have popped up in sell-side analyst reports in recent months. This is a big leap for an industry that needs to evolve beyond backward-looking analysis and postearnings commentary, said Carl Kirst, director of U.S. equity research at BMO Nesbitt Burns. Tim Shufelt reports (for subscribers).
Jump on these 3 ETFs to capitalize on the recent surprise windfall for bond investors
Gordon Pape takes a look at three bond ETFs that can help investors manage the volatility in the markets. (For subscribers).
Is it finally time to cash out of this Buffett-like U.S. pharmaceutical stock?
Just because generic drug maker McKesson rose to a new 52-week high recently and faces settlement costs related to its role in the U.S. opioid crisis, doesn’t mean it’s time to sell this stock, argues George Athanassakos.
The four types of risk in investing
Sam Sivarajan looks at the kinds of risk investors need to be aware of including volatility, shortfall, liquidity, an capital loss.
Others (for subscribers)
CannTrust shares plunge as pot producer runs afoul of Health Canada for second time
Socially responsible investors don’t seem to mind holding gun stocks
Investors look for consumer pressure ahead of next tariffs
Monday’s Insider Report: CEO invests nearly $900,000 in this dividend stock
Monday’s analyst upgrades and downgrades
Monday’s small-cap stocks to watch
Others (for everyone)
How three fund managers are faring in a philanthropic investment challenge
The Globe’s stars and dogs for last week
Market weighs risk of negative U.S. Treasury yields
Ask Globe Investor
Question: I know of someone 63 years of age who does not hold a tax-free savings account. How much is he eligible to contribute, starting now? Also, how much did the Mawer Balanced Fund drop in 2007-2009?
Answer: Your friend could contribute up to $63,500 to a TFSA in 2019 – that’s the lifetime limit to this year.
Between Jan. 1, 2007 and the market bottom in March 2009, the Mawer Balanced Fund lost about 17 per cent.
– Gordon Pape
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What’s up in the days ahead
The Contra Guys have done very well in the past year with Alacer Gold - and they have no plans to sell yet. They’ll explain their rationale.
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Compiled by Gillian Livingston
Scott Barlow