Just Say Negative

Insensitivity is on the rise.  It’s taking the world by storm. One only needs to open a newspaper to gain an understanding of how different the world looks today from days in the past.  Even the President of the United State is praising increased insensitivity.  You might be thinking Atlas should stay in its lane when it comes to these morning notes, but we feel compelled to talk about the elephant in the room: negative interest rates.

It’s price insensitivity we’re talking about.  And yes, President Donald J. Trump did comment via twitter about the disadvantage America has compared to other developed countries with lower borrowing costs.  In particular, he referenced Germany.  Germany made headlines this week when the country auctioned 30-year bonds with a negative yield; the nation’s entire yield curve is now negative.  Those purchasing the bonds are paying the German government to borrow their money.

In economics, price insensitivity describes a scenario where rising costs do not dissuade demand.  Think of the illegal drug market.  When those unable to ignore the siren call of their next high are faced with rising prices due to a limited supply because law enforcement disrupted the local dealer’s logistics, they tend to put forth greater efforts to procure their fix.  In the fixed income market, yields fall (even below zero) when prices rise.  Those buying at the German auction are paying so much for the debt that they will not see a profit if they hold the long-dated bonds until maturity.  

So, are market buyers of German bonds addicted to them?  No.  Even though the auction did sell bonds at exorbitant levels, they were not able to sell all the bonds being offered.  They were trying to offload two billion euros but managed selling less than half of the goal.  Some needed to get their fix, but several other participants chose to just say no and will look for other debt issuers to get their fixed income.  Gee, who could that be; the U.S. maybe?