The “Mass Psychosis” in Bonds Takes a New Twist

A propitious day in our era of negative-yield pandemic.

For the first time ever, Germany sold 10-year bonds with a zero-percent coupon today. It sold these “Bunds” at a price that was above face value. So not only do investors not get a coupon payment, however minuscule, they’re also not getting all their capital back when the bonds are redeemed in 10 years at face value.

So on this propitious day in our era of negative-yield pandemic, these Bunds in the €4.038 billion issuance produced a negative yield of -0.05% and no coupon payments.

The only way buyers can make money on these things is if the yield drops deeper into the negative, and if they sell the bonds at this lower yield and thus at a higher price well before the maturity date – because on the maturity date, these bonds are worth their face value, not a cent more, no matter what the interest rate may be.

Buyers that hang on to these bonds until maturity, which is what many buyers have to do to meet their needs – such as pension funds, insurance companies, etc. – are guaranteed a capital loss plus zero interest income, topped off by the loss of purchasing power due to 10 years’ worth of inflation.

If rates rise, traders will lose a ton of money, and those holding the bonds to maturity will also lose money. So this is a royal rip-off.

But no problem. In the secondary markets, 10-year Bunds trade today with a yield of negative -0.14%.

These 10-year Bunds are used as a benchmark for pricing other European securities. Hence, the guaranteed losses will reverberate through the investment environment.

By now, the ever growing global pile of bonds with negative yields has reached about $13 trillion.

Why would anyone be this stupid? Why would so many investors be so stupid? Why would the biggest buyers of this rip-off – institutional investors who manage other people’s money – be so stupid? No one knows. “Central banks made us do it,” they’ll say afterwards as an excuse.

Bond specialist Jeffrey Gundlach, CEO of DoubleLine Capital, has another phrase to describe the phenomenon: “Mass psychosis”:

“There’s something of a mass psychosis going on related to the so-called starvation for yield,” he said during a webcast yesterday, according to Bloomberg. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”

In theory, at least, rates can rebound. But Gundlach doesn’t expect that to happen quickly. He said it might take till next year before the 10-year Treasury yield will once again exceed 2%. It’s now at 1.46%.

Gundlach offered another gem, this one about a potential bank bailout to deal with the European banking crisis, according to Bloomberg:

Policy responses to insolvency concerns for European banks are likely to be “bond unfriendly,” creating inflation “that would take everybody by surprise.”

A bout of inflation would be the killer app. It would destroy those bondholders that are not being compensated for any risks, including inflation, and who, as is the case in Europe and Japan, are paying for the privilege of lending to the government. If inflation ranges around the 2% that central banks are talking about, the 10-year Bunds with their zero coupon and their negative yield will lose nearly 20% in purchasing power when they’re redeemed. But inflation could go quite a bit higher….

And why do institutional investors stand in line to buy these bonds? Mass psychosis, as Gundlach said, is one reason. The other may be that they don’t have a choice (and central banks know that); and that ultimately they’re managing other people’s money, and so who cares?

Ironically, the Fed, which kicked off this madness in grand style during the Financial Crisis, is currently the only one of the big central banks flip-flopping about raising rates. The Bank of Japan, which invented this madness years before the Financial Crisis, the ECB, which belatedly got into this madness, and other central banks are flip-flopping about lowering rates and diving deeper into their QE shenanigans.

Here’s the gloomy scenario the “smart money” is betting on. Read…  Fear, Loathing & Record Money-Making in Government Bonds

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  59 comments for “The “Mass Psychosis” in Bonds Takes a New Twist

  1. A national default no matter who it is or how how ‘structured’ would put an end to this nonsense. Negative carry insists there are not only no risks but that the idea of risk itself has become ‘obsolete’.

    It’s hard to put your head around ‘anti-risk’. It’s also hard to put your head around a segment of the investor class being so foolish. Bonds cannot be off-loaded to dumb money like stocks, the Number One Fool in the Market John Q. Public does not play directly in the bond market. Most of these holders are stuck with these bonds: they are going to be destroyed when the inevitable ‘something bad happens’ and they cannot worm their way out the exit door.

    • Jungle Jim says:

      For many of the investors (if that is even the right term) they have no choice. Pension funds and insurance companies have nowhere else to go with their money.

      What scares me is that with every crackpot scheme the central bankers devise, they make the eventual denouement that much worse. And it isn’t even the public they are trying to protect, it is themselves.

    • Crnogorska budala zovite me Milo says:

      “Dumb money like stocks” hahahaha I just made 8% in less than two weeks on my investment in stocks and you guys enjoy 0% bonds.
      There is no risk and no default, this ride is to oblivion.
      Markets are all time high, regardless of doom and gloom, Brexit etc.
      There is only one way to go and it is UP, or if you want to crush markets third WW is only solution.
      Question is: ” Which one you prefer”?

    • RK says:

      You put it so well

    • bernie says:

      Negative rates means there is the result of too many dollars chasing too little return. With central banks buying bonds the supply of cash always increases and so rates keep going down. The only way the bond market can normalize is after vast amounts of cash are destroyed by capital losses. Historically, this has always been done via high inflation and it won’t be different this time. The inflation will devastate stocks and bonds. Pensioners will lose their retirements. That’s the only way it can end because normalization without losses is a fairy tale.

      • d says:

        It can also end with massive NPL Implosion which only takes “Assets” from 1 sector that actually dosent have any freehold assets.

        Negative rates. Particularly in Europe, are the only thing staving off the NPL problem.

        The tricjk is to controll that implosion over along time frame to avoid chaos.

        which the ECB could do if iot was run by a governor and not a Mafiosi who is only interested in bailing out Italian bank’s with German taxpayers money.

  2. Merlin says:

    Are any large US-based mutual funds buying this crap? Vanguard? Fidelity?

  3. nick kelly says:

    There is one scenario in which so many lunatics manage to turn a profit- deflation.
    With the largest stimulus in history producing inflation that is around 1%, maybe that will happen when it is withdrawn or wound down.
    BTW: of course, virtually none of the institutions buying the ten- year or longer have any intention of holding them to maturity.
    Most of this money is ‘parked’, not invested.

  4. Vanisle500 says:

    At some point there is a greater fool who will be the bag holder. Look at your pension plans people, are you going to be the bag holder?

    • NotSoSure says:

      Do they even need to look? The manager of the plan probably has an off balance book with enough derivatives related to these bonds.

  5. EVENT HORIZON says:

    What can Pension Funds and Insurance companies do with the funds they DO have? Well, in my unprofessional mind, they don’t have to buy negative % Bonds: Instead, why not buy:

    1) Class A Commercial buildings in “proven” cities, within close proximity to the major business of that city.

    Take D.C. for example. Buy up the Class A office buildings and hotels nearest the Capital, the Smithsonian, etc.

    Take New York City. Buy up the Class A office buildings at the Southern end where the key financial players are.

    So, look at each city and buy in the most “stable” area. I know, I know, nothing is stable, but a 5-Star hotel across the street/park from the White house just might be worth more, in 10 years, than a -0.5% Bond.

    Buy the best Movie production Studios.
    Buy the best Hotels/casinos in Vegas.
    Buy all the big 3 US car manufactures and be ready to import all your cars from China……or go non-union (be prepared for this move BEFORE you buy…when the Unions strike…fine….hire illegal immigrants since that is legal) The Unions shut you down? Fine, now import your GM cars from China at 1/4 the US manufacturing price.

    I’m certainly no genius in this area, but I am sure there are those who can pick out the best of the best properties that should do better than -0.50% per year.

    • Wolf Richter says:

      Actually, they’re doing exactly that. They’re big owners of commercial real estate, such as office towers, apartment complexes, warehouses… They’re into all kinds of things, including infrastructure projects. They own stocks. Sometimes, they own companies outright. Buffett’s empire does that a lot.

      But they’ve got to have a diversified portfolio with a big part being safe assets with predictable returns that generate cash (at maturity) in a certain predictable sequence so that these insurance companies and pension funds can meet their predictable obligations.

      Selling an office building because you need the money can be a dicey affair. If the market is down – and CRE goes in huge cycles – you’re liable to lose a lot, if you HAVE to sell. Hence they have to use a lot of bonds in their portfolios.

      • David in Texas says:

        Just look at the saga of the Dallas Police & Fire Pension system and the “Museum Tower” to see where this will lead.

        Hint: not to full payment of promised benefits!

        • Wolf Richter says:

          Reminds me of California. Hey, Texas and California have something in common!


        • chris Hauser says:

          “They were in vests that said ‘FBI,’ so you can assume it was the FBI,”

          um, they call it likes theys sees it in texas.

          what happens when all the quality has been flown to?

      • Tonytank says:

        Aside from this craziness and the need to diversify, is there still the Big 8 brokers/houses requirement to purchase issues in play? Prior to the repeal of Glass Steagall, wasn’t there a rule that big boys like Merrill had to purchase a certain amount of government issue 10s and 30s just to keep their hand in the game? Is that still a hold over?

        • nick kelly says:

          I can’t imagine that you could be a primary dealer very long if you didn’t at least bid on the bonds.
          But a funny thing happened a month or so ago- on a issue of ten years paying 1.7 %- some primary dealers didn’t get any, despite bidding.
          This is unusual.

      • night-train says:

        The Alabama State Employee’s pension plan paying my retired wife’s benefits has been investing in real estate, buying companies, and providing funds to help bring businesses to the state. The fund has built several office complexes in the state’s capitol, many of which they lease to state agencies. They have developed their own golf resorts. They own a large office building in Manhattan (the big one, not the one in Kansas). Alabama now is a major player in the automobile industry, which the RSA helped bring to the state, starting with Mercedes. We recently got an AirBus manufacturing facility in the port city of Mobile. Thousands of private sector jobs have been created for the knuckle draggers in this state with this fund, and yet they still begrudge the state employees having a defined benefit plan (pre-2011 hires).

        Surprisingly, the state retirement funds are the least corrupt institutions in the state. The GOP Speaker of the House was recently convicted of several criminal offenses of influence peddling. The GOP Governor is facing a Federal investigation and impeachment. And the GOP Chief Justice of the State Supreme Court faces removal, for the second time.

        But we do have nice beaches and great golf courses. Y’all come on down.

      • prepalaw says:


        you might remind everyone that 3 or 4 real estate trusts in England very recently stopped making redemptions because they did not have sufficient cash on hand and because the items in their portfolios could not be liquidated quickly.

      • Bernie says:

        So what you’re saying, Wolf, is the pension funds are doing the best they can but will still lose their shirts. That sounds right.

    • Thomas Malthus says:

      Why not buy physical gold and silver?

      • night-train says:

        Not buying, but hanging on to what I have. But what do I do with the dozen or so gallon jars of non-silver quarters I have laying around? Besides putting them in socks to make truncheons?

  6. Petunia says:

    Aside from the fact that the price of money can never be less than zero, it should tell you the money is worthless, the bonds are worthless, and the country is broke. The only other explanation is simpler, fraud. They are using complexity and mumbo jumbo to steal your money.

    • night-train says:

      It’s more fun to have a magician steal your money on stage. There is at least entertainment value in that.

  7. Tim says:

    Another possibility is that people don’t want to hold money in large deposits in banks if there is a colossal financial crisis, that could result in loss of funds.

    Money could be safer in (some) sovereigns than in zombie banks. And there are a lot of zombie banks. Maybe a massive crisis is on the way.

    • EVENT HORIZON says:

      Tim, your answer is the one I most agree with. Above a small amount, all money in any Bank is unsafe. You do have a chance of 100% default if the bank bails you in. With a US Treasury, you have a good chance of getting most of your money back.

      The choice is very simple. Get back 95% in 10 years with only 70% purchasing power, or lose it all in the next Bank crisis. Investing has nothing to do with an economy today. It is ALL one huge beautiful fraud.

      As for 0%, or less, for your money? This is the way the Central Banks are telling you that they don’t need your paper notes, etc. since they can, and have been, issuing their own notes for over 100 years. Why pay you ANYTHING (what they already know, and you are learning), for worthless printed pieces of paper.

      0% interest is final admission that your paper never ever had value.

      The most amazing and brilliant theft in all of history. A small group of families achieved the ultimate robbery of the World.

      • Wolf Richter says:

        I had deposits with three banks that collapsed, including two big ones, MBank (Texas oil bust story) and Washington Mutual (CD with a fat coupon). Those deposits were FDIC insured. I got every dime back, including interest, as my deposit accounts and CDs were transferred to another bank. There wasn’t even any wait.

        There’s a huge difference between being an unsecured creditor (bondholder for example) and being an unsecured but government-insured creditor. People need to understand that difference. It worked even during the financial crisis!

        • Tim says:

          Well, the same idea applies to getting out of bank bonds, and into ‘safer’ sovereigns, as getting deposits out of zombie banks, I should have included the ‘beyond insured amounts’ that was actually in my thought. The FDIC and CDIC work fine, but now we have bail in provisions, at least for larger deposits, and so, caveat emptor.

        • TheBloomIsOffTheRose says:

          Did bail-ins exist at the time of the financial crisis?

        • jonlaughing says:

          And there is a big (huge) difference between a retail client with $100,000 and a pension plan with $100,000,000. FDIC doesn’t cover that. What the pension plans, mutual funds, insurance co’s need to do is form a private Fort Knox or rent space from the real Fort Knox and just take the cash and place it there. An average guy can buy a safe and put it in his basement or behind the portrait. Welcome to the 1600’s.

      • polecat says:

        Well…..brilliant until some of ‘those families are done in by the long knives…..

        They’ll be done in via their smug hubris and greed! How else would you expect MILLIONS of impoverished citizens to react

      • nick kelly says:

        No one lost a dime in a Canadian bank during the Depression when several thousand US banks went under taking most of their deposits with them. Last Canuck loss was Home Bank 1926.
        As Wolf points out- you are pretty safe if your deposit is federally insured, at least in Canada and US.
        Where you have to worry is if your deposit exceeds the amount insured- it was 60K in Canada for a long time- may be 100K now.

        • Wolf Richter says:

          Thanks, Nick, for the confirmation that this system also works in Canada.

          In the US, deposit insurance is $250,000 per eligible account. You can buy 10 CDs of $250K each from 10 different banks (your broker makes this easy), and they’re all insured. There are other ways to increase the insured amount. The FDIC website explains the rules.

        • Nicko says:

          Canada still has their AAA rating. ;)

      • chris Hauser says:

        don’t be silly.

        it’s called currency. do something with it.

        on the other hand, the root of all evil is the lack of money.

        a lot of people lacking. people need work, and need to work.

    • Rupert C. Rupertford III says:

      This is exactly right. If you have 100 Billion, you can’t keep it in cash. Your “cash” in a bank account is nothing more than a contract right to be paid by the bank. There is much less risk owning obligations of the German government.

  8. Jerry says:

    It is not about investing anymore…… its about surviving something.

    Folks that are buying bunds are taking a bet that the Euro will fail and they will be paid out in DMarks.

    Bond buying
    Equity buying
    Mark to book instead of mark to market
    Govt house purchasing schemes

    NIRP causing large holes in pension schemes because most schemes were modelled on an interest rates of 6 to 8%
    Dodgy employment figures.
    Bulk dry index at record lows.
    Commodity price collapse.

    Who the hell would believe this crap, Govt will issue as much paper as they can until they can’t.

    It’s over it’s just a matter of time when the gamblers realise that the bonds are never going to be honoured there will be no bids.

    History always repeats. Who would ever pay the same amount for a tulip than they would pay for a house.

    Think about it.

    • Agnes says:

      Tulips and houses….maybe The City of London is for Brexit because they have institutional memory and realize we need to correct before the problem gets any bigger—catastrophic deflation I mean. So they aim to be the cheese standing alone? Go long GBP?

    • Bernie says:

      I agree, Jerry. It’s survival. Yes, the old folks could get their $250k CD paid off by government insurance when the bank fails or they could get bailed-in above a certain amount. Do we really understand the rules? Let’s be honest. The system is failing and the system is an oligarchy. Should we trust them? I put half my cash into gold coins. How’s that for trust.

  9. David Calder says:

    This has to mean everybody, including the banks, is betting on deflation and wouldn’t that mean a depression?

    • Michael Gorback says:

      My thoughts exactly. The only rational reason to buy negative rates is if you think it’s good to lend at -0.1% because the currency will appreciate 3%.

      Or you might buy these crappy deals because you need collateral for your trades which is 10x worse.

      • chris Hauser says:

        you lend at that for two reasons: you have to, for collateralization reasons, or because you think rates will go lower……

  10. d'Cynic says:

    I can see some convergence here between the newfound push for trade agreements and negative yielding bonds. The ultimate prize asset is ownership of natural resources and infrastructure: water, roads, railways… If you can make governments to divest those and sell it to private investors, and be protected from re-nationalization – baring revolution, you have a great, steady asset that beats government bonds.

    • chris Hauser says:

      utilities are a needed item.

    • Nicko says:

      This isn’t implicitly a BAD thing. Countries like Venezuela or anyone in Africa desperately need FDI. The best services in these developing countries are usually run by foreign corporations, such as mobile phone companies. Rewards can be great too, in many African markets you’ll find greater than 10% annual growth.

  11. Chicken says:

    Isn’t the majority usually on the wrong side?

  12. r cohn says:

    Why do pension funds and insurance companies have no other choice?

  13. Gregg Armstrong says:

    History will forever record that President Barack Hussein Obama’s ruinous economic policies deliberately bankrupted the pension plans of every retired and currently working American worker to increase banking system profits. That the Mainstream Media Oligopoly dutifully suppresses these facts for Obama will destroy what little remaining credibility they possess.

    • David Calder says:

      You can blame the Prez if you want but we are nearly alone with positive interest rates.. It’s the rest of the world that has dipped into ZIRP-NIRP.. It’s Europe’s ECB that used austerity as a scam to recapitalize the banks which are in not much better shape than they were right after the crash. And for what? The people have been devastated by their policies. As far as the MSP goes; it’s not possible for them to sink and lower..

    • Nicko says:

      Pretty sure Obama saved the country (and western world) from a global economic depression.

      • d says:


        Hew kicked the can and laid teh ground work for a huge catastrophie by kicking it instead of biting it

        Now the pain will be far far greater than what it would have been had he dealt with it then.

        O bummers can kicked creations are nothing compared to the Crap hiding under the rug in Europe and china./

        • Jerry says:

          You are absolutely correct about Europe.

          To help the banks make their books look healthier they changed accountancy rules so they can report their securities higher. They changed it from mark to market and allowed mark to book. Which means that if they loaned a 100k to purchase a building for a 125k and that building is now worth 75k they can still book it at the original value of 125k.

          When the tide goes out that is when it exposes all the dead bodies, like Madoff.

          When the the next recession bites it will be a real doozy.

  14. John Doyle says:

    Is not all this argy bargy down to deflation? Look at every graph about the economy posted on line. They all drop down to the right hand side, except for levels of debt.
    Deflation is the norm, especially with western economies. Debt and demographics, resource issues and lack of investment all shape this slide.

    IMO, it’s not going to get better. It’s going to get worse. We are in the end game.

  15. Konstantin KS says:

    These investors are not psychotic at all. The scarcity of AAA debt simply predicts long-term depression. Normally, in that case, there should be no money to be invested, so rates would normalise but it seems that a hell lot of money is in the hands of those that not only won’t need it today, but absurdly enough, they still demand a yeld. A yeld out of what?

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