If you just follow the stock market, you may have missed the biggest financial news in years. That news is the rise of negative interest rates—or bonds that pay investors less in total than what it costs them to invest.
In the past, you may have bought a bond with a par value of $100 for, well, $100. And after receiving interest, you’d get back your $100 value, ensuring a total positive return. Negative yields occur when bond prices are so high that, even after all interest payments are made, you don’t get back $100 for every $100 you put in.
The rise of these negative-yielding bonds is underway, and could spread to other places besides some government debt markets they’re in now. If that’s the case, then the bond market could give investors some great returns over the next few years as bonds priced at $100 and required to pay back $100 may go to a price of $110 or higher!
Of course, negative yielding bonds go against everything we know about finance and capital formation. It’s uncharted territory, and when bond yields are negative, investments with no yield, like precious metals, start to look attractive. That may be part of the reason for gold’s strong performance so far this year.
Finally, in a negative-yield world, any stock that pays a dividend can produce a positive yield and return over time. This push for lower bond yields may entice investors away from bonds and into the stock market—and give stocks the mother of all rallies!
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