Investors may have to grapple with the possibility of the once-unthinkable becoming reality - negative U.S. bond yields, according to giant money manager Pacific Investment Management Co. on Wednesday.
“It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative,” Joachim Fels, Pimco’s global economic advisor wrote in a blog post.
The negative rate policy and massive bond purchases the European Central Bank and Bank of Japan have resulted in about $14 trillion, or 15%, of the total amount of bonds around the world posting negative yields, Fels noted.
“However, we believe central banks are not the villains but rather the victims of deeper fundamental drivers behind low and negative interest rates. The two most important secular drivers are demographics and technology,” Fels wrote.
In the United States, if the Fed drops domestic borrowing costs back near zero and restarts quantitative easing to avert a recession, negative yields on U.S. Treasuries “could swiftly change from theory to reality,” according to Fels.
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