Rising fear and uncertainty in global markets have morphed into something close to panic, as the Brexit vote draws near, economies continue to sputter and central bankers run out of easy-money tricks to stimulate lending and spending.
Investors are plowing into the safest government bonds. On Tuesday, the German 10-year bond slipped into negative territory for the first time, the Japanese 10-year yield hit a record minus 0.175 and bond returns elsewhere posted historic lows.
Intense demand is pushing up bond prices and thus driving down yields around the world.
Preserving capital is the name of this game, even if it means paying interest for the privilege of lending money. What was once unthinkable is becoming the norm. JPMorgan calculates that subzero sovereign bonds now total a whopping $8.3-trillion (U.S.) and account for nearly one-third of its government bond index.
"It's just fear that it's going to get worse and that it may have repercussions for some of the major institutions," said Marilyn Cohen, chief executive officer of bond specialist Envision Capital Management in Los Angeles. "They want to run to safety for their money, even though they know they're going to have little bites taken out of it."
The latest British polls and bookmakers' odds show the Leave side surging to the lead before the June 23 referendum on whether to stay in or quit the European Union. Given the ratcheted-up rhetoric about the drastic consequences awaiting both the EU and Britain if Britons opt out, investors are understandably on edge.
European Council President Donald Tusk had this to say to German newspaper Bild the other day: "As a historian, I fear Brexit could be the beginning of the destruction of not only the EU but also Western political civilization in its entirety."
Yikes. No wonder people are looking for any stable-looking craft in a storm-tossed sea.
"Markets are on the verge of a full-blown panic selloff due to rising probability of Brexit," Rabobank analysts opined in a note.
But others describe the stampede to safety as reasonable under the circumstances.
"It shows that potential Brexit would be a major event and that people don't know exactly the impact of that event," Jean Lemierre, chairman of French bank heavyweight BNP Paribas, told The Globe and Mail's editorial board Tuesday. "But I do not think it is a panic. Would it last [beyond the British vote]? In my opinion, no. Because a Brexit would have no impact on the euro system."
The 10-year German bond, the euro zone's benchmark, had been flirting with zero for days, and shorter German maturities had already slid below the line.
"The fact that they have dipped into negative territory does not carry any special economic significance," Phillip Colmar, a strategist with Montreal-based MRB Partners, said in a note. "Yields were already extraordinarily low and were … really consistent with a Japan-style lost-decade outcome for the euro area."
Government bond yields will head higher if the Stay side prevails in the British vote and the U.S. economy keeps improving, Mr. Colmar said. Still, it seems unlikely that investor jitters will abate soon because other factors beyond the risks of a Brexit – more heavy central-bank stimulus in the euro zone and Japan, an indecisive-looking Federal Reserve, continuing woes in key economies – remain in play.
"I don't think any of this is going to settle down for a while, even after we have the Brexit vote," Envision Capital's Ms. Cohen said in an interview. Why? "This negative-interest-rate atmosphere that Americans and probably Canadians are worried is going to be exported to us has really put people in a quandary."
Foreign investors have also been pouring money into U.S., Canadian and other government bonds that do pay interest. This includes riskier peripheral European and emerging-market debt and tax-free U.S. municipal bonds, despite the fact there is no tax benefit for non-U.S. residents.
In the 12 months to the end of March, Europeans had snapped up $384-billion worth of U.S. bonds.
Meanwhile, the ball is in the central banks' court.
"Nobody has any frame of reference for this. So how the central banks get out of it, how they unwind it is all a big mystery," Ms. Cohen said. "That is the No. 1 pervasive black cloud over all these markets."