Yields for bonds in many developed European economies, including Germany and Switzerland, have turned negative, yet investor demand for the bonds remains strong.
What's the explanation for this conundrum? "The most likely [explanation] is the simplest: the bond buyers actually expect a positive yield thanks to currency appreciation," University of Georgia economist Jeffrey Dorfman writes in a column for Real Clear Markets
The way that would work for a U.S. investor would be for the euro to rise against the dollar. That way when a U.S. investor sells or redeems a euro-denominated bond, the euros would be worth more in dollars, he explains.
"What looks like negative yields may actually be hiding expected positive returns after accounting for the effect of currency appreciation gains."
In recent weeks, of course, the euro has plunged, hitting an 11 ½-year low of $1.0825 Monday.
"Given that the European Central Bank (ECB) is about to start its own version of quantitative easing (QE) and that the dollar has been strengthening against the euro, it might seem counterintuitive for investors to be counting on the euro strengthening versus the dollar," Dorfman notes.
"However, apparently the investors are convinced that the Fed will eventually succeed in its quest to create inflation (while also believing that Germany will not allow the ECB to create much inflation in Europe)."
Meanwhile, there will be no more shooting fish in a barrel for investors seeking to profit from the quantitative easing in vogue for central banks around the world, says Mohamed El-Erian, chief economic advisor at Allianz.
"We should respect the QE trade," he tells CNBC
. "I don't think it's the QE trade of the old type, which is the generalized compression in all the risk spreads and risk premiums. That's gone, so I think it's much more a relative trade."
While the Federal Reserve ended its third round of QE last year, the Bank of Japan intensified its QE, and last week the ECB announced that it will be buying 60 billion euros ($65 billion) of securities a month.
"The main issue facing a lot of investors today" is whether to chase the rallies in financial markets sparked by Europe's QE, El-Erian states. Instead, he suggests investors "focus on specific stories in the equity market."
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