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The Below-Zero Gravity Effect


Negative yielding bonds are dominating headlines and rightfully so as it is an unnatural concept. I claim that it should be considered the “9th wonder of the world” behind Einstein’s claim that compounding interest is the 8th. If you ask most investors, the basic concept is hard to comprehend, however, those who purchase them have entered the bargaining phase of the Kubler Ross model of grieving. They are willing to hypothetically “limit” losses in hopes of an underlying currency return. This sounds reasonable considering the U.S. dollar has rallied significantly and the two currencies that dominate the negative yielding debt have potential for rallies. Yet you are still entering a “deal with the devil” in that the currency can continue to move in ways you couldn’t comprehend…ask the People’s Bank of China and the U.S. Treasury. Many fortunes have been lost betting against currency movements.


While we could spend a great amount of time debating its merits, it is far more important to investigate the side effects of negative yielding debt. First, a bit of primer on the negative yielding debt data set: (As of 08/13/19 per Bloomberg)



  • $15.6 trillion outstanding (all-time high) with average maturity 6.24 years. Began measuring it in January 2010, since it never was thought to be measured prior.

  • In September 2018 the total negative yielding debt stood at $5.7 trillion (an increase of 173%)

  • Average yield to worst is -0.37% and consists of 4,234 issues.

  • Nearly $800 billion of euro-denominated Corporate bonds carry negative yields, with half maturing in greater than three years.

  • Austria 2117 maturity bond trading at 194 and Switzerland 2064 maturity trading at 213. Remember par is 100 on bonds. An almost bigger shock than the price for these bonds is that there are bids for bonds at these levels and its not just a pricing mechanism.


What this creates is a gravitational pull for all things yield. While we have subscribed to the zero-gravity world in the United States, the rest of the world is in below-zero gravity. With the recent rallying move in the Treasury markets and enabling action by the Federal Reserve, we now see the market expects many more cuts. Consider the End of Year Interest rate (in percentages) expectations (consensus estimates) versus from the futures market on the G10.


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Global central banks have terra formed the monetary world in a reactionary way. As such monetary world is unpredictable and resilient to traditional forms of treatment. The markets are far more concerned about growth than the consensus of economist estimates. So far, the markets have won out with recent developments from the European Central Bank, the Federal Reserve and the People’s Bank of China, to just name a few.


As such, this has pulled down yield from traditional income-generating instruments across the globe. For those looking for yield, we continue to see dividends as a place to emphasize in assisting this process. One thing that may catch people off guard is the counterintuitive component that quantitative easing (QE) has had on dividends. QE began to ascend during the last recession and has us to roughly $20 trillion in total central bank assets for the Federal Reserve, European Central Bank, Bank of Japan and the People’s Bank of China.


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The impact of QE had a counterintuitive conclusion by seeing dividend yields rising as global rates plummeted and equity prices went up. Is this a new abnormal? There has only been a slight change in the S&P 500 looking over a longer period. The median dividend yield of the S&P 500 was 2.0% since the Great Recession ended compared to 1.9% when measured from 1990-2006. However, that is with a price increase of over 200% and the dividends have been very stable and steadily increasing.


The question many have is whether or not this can continue. Continuing with the analysis above, the cash flow yield of U.S. companies has surged greatly compared to the median of the periods without QE. From 1990 to 2009, the cash flow yield on the S&P 500 had a median level of 4.0% while it has been 5.8% as measured since the end of the recession. This has the potential to help alleviate some of the concern about the flexibility for companies to maintain and increase dividends in the future.


We recently published a video on five abnormalities and anomalies and why differentiating them is crucial. Spoiler alert: abnormalities are behavioral, and anomalies are metric based. There were many that were left off. One of which is that we have a current overabundance of cash and anxiety while historically the tail end of market runs is ripe with less liquidity and euphoria. This has led to a pragmatic run up in prices with the fear the next “black swan” lay just beyond the next corner.


There is an enormous psychological impact to interest rates that is often disregarded by market participants, most of which have been conditioned to think in linear and quantitative frames. The world is vulnerable to the gray and subjective as it has become the biggest blind spot. These biggest blind spots are the ones that we believe we have removed from the equation. Since we disregard it by either ego or herd behavior, it is often the one that has the bigger impact since it is the bigger shock when it occurs.


In a world where income demand is increasing and instruments yielding enough income, we continue to focus on dividends as a key component to return and income and believe it has the potential to become more important in a world suffering from the pull of negative-zero gravity.


CRN: 2019-0806-7604R


This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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