Former Federal Reserve Chairman Alan Greenspan says he wouldn’t be surprised if U.S. bond yields turn negative. And if they do, it’s not that big of a deal. “There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan, who led the central bank from 1987 to 2006, said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.” Negative yields are confounding traditional fixed-income investors. Lenders traditionally were compensated for parting with their money, while borrowers paid to use that cash for some purpose. That’s no longer the case in many markets outside the U.S., with more investors coming to grips with the changing dynamics of global markets over the last few years. Escalating trade tensions between the U.S. and China, worsening global growth, political tensions in Europe and more central banks embarking on policy easing has resulted in more than $15 trillion of negative-yielding bonds worldwide. Add in U.S. stock-market volatility that is prompting investors to scoop up Treasuries and the result is yields on benchmark U.S. securities racing toward record lows.
Speculation that the Fed is behind the curve when it comes to easing monetary conditions is adding fuel to the fire. While current Fed Chairman Jerome Powell last month referenced a mid-cycle adjustment when the central bank lowered rates, Wall Street strategists increasingly see that type of minor easing as unlikely as recession risk grows. Germany’s entire curve is already fully below 0%, while even the 10-year yields of some of the riskiest nations in the euro area — such as Spain and Portugal — are getting close to negative. Demand for 30-year U.S. Treasuries has been so strong that yields fell Tuesday to as low as 2.0951%, just above an all-time low. Joachim Fels, global economic adviser at Pacific Investment Management Co., detailed earlier this month a view that there’s been a change in the fundamental economic theory of time preference that helps explain why people are buying debt with negative yields. He postulated that extended life expectancy and an aging population have caused people to value future consumption more than current spending. Greenspan, 93, said he views Fels’s thesis as very plausible and also a reason why more debt has a yield below zero. He doesn’t think it will last forever. “Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,” Greenspan said. “But there is hundreds of years of history showing the long-term stability in time preference, so these changes won’t be forever.” Jack Malvey, another long-time prominent figure in the bond market, also prefers to use centuries of bond history to guide his views. The former chief global fixed-income strategist at Lehman Brothers Holdings Inc. says he has charts of long-term yields back to the 1800s. Data back through the 1930s show that yields can “stay hyper low for years and years,” he said. “The worldwide demand for Treasuries can feed upon itself,” said Malvey, who does consulting now. “The unbelievable negative rates in Japan and across parts of Europe reinforces the temptation for international institutional bond investors to diversify by acquiring U.S. fixed-income securities. It’s certainly possible that Treasuries could penetrate historic floors.”