European Central Bank President Mario Draghi speaks during the Euro Conference Latvia 2013 in Riga September 12, 2013.INTS KALNINS/Reuters
Negative bond yields sprouting up across Europe may seem bizarre. But the strong demand for such assets shows that investors are willing to pay for flexibility, liquidity and security in "a pretty unusual world," says Jean Boivin, a former deputy governor of the Bank of Canada and a senior federal finance official.
"It's not that different from why people are willing to leave cash in their bank account and forgo the return they would get by investing in a safe long-term bond in normal times," Mr. Boivin, who jumped to the private sector last September to become deputy chief investment strategist with BlackRock Investment Institute, said in an interview from his office in London.
"In a normal world, we are willing to accept zero return for cash and forgo positive interest rates for longer-term assets. In the world we are in now, where even longer-term assets have very low rates, people are willing to pay an additional fee to be able to enjoy the benefits of safety and liquidity that come with that kind of short-term asset."
Germany has just issued its first five-year bond with a negative yield (following the lead of another euro zone member, Finland), which means investors are guaranteed to lose money if they hold the debt to maturity.
As unattractive as this sounds, demand has outstripped supply, partly in the expectation that bond prices will shoot up when the European Central Bank launches a bond-buying spree this month totalling at least €1.1-trillion ($1.23-trillion U.S.) in its first major foray into quantitative easing.
Institutional investors such as pension funds and even banks have been big buyers of the negative bonds. It all stems from the ECB's stimulus strategy. Leaving their excess cash with the central bank costs commercial banks a dozen basis points more than buying the new German issue, with its average yield of minus 0.08 per cent.
"We're now living in a world where negative rates are part of the norm to some extent. We're adjusting to that world," says Mr. Boivin, who doesn't see this trend ending any time soon.
The amount of negative-interest European bonds sloshing around the debt markets has skyrocketed to $2-trillion – close to a third of the market – up from almost nothing just a year ago.
The list includes $1.7-trillion worth of debt issued by fiscally sounder euro zone governments, including the Netherlands, Austria and Denmark, as well as Germany and Finland. But bonds from such blue-chip European companies as Nestlé, Royal Dutch Shell, BP, Deutsche Bahn, Novartis and France's EDF have joined them.
Markets will remain under the spell cast by central bankers, although policy makers will increasingly diverge this year, as a tightening Federal Reserve puts some daylight between itself and its counterparts dealing with stalled or retreating economies.
"We see central bank divergence as the major theme behind asset class performance for 2015," Mr. Boivin says. "We're looking forward to the moment in time when, finally, central banks will take a step back and play a role that is more in the background. But that won't be the case this year."
Mr. Boivin would not comment on specific Canadian monetary or fiscal moves, but acknowledged that the unfolding oil story poses a major challenge for policy makers.
"I certainly think that this is a significant story for Canada right now and it's a challenge to figure out what it exactly means."
What is obvious is that oil exporters face "more concentrated pain." But Canada is also a diversified economy. "Striking the right balance about what it means [in terms of pluses and minuses] is an active source of debate in Canada, which I need to stay away from," Mr. Boivin says.
This could be interpreted as evidence he hopes to return to Ottawa's senior policy ranks at some point.
"I love what I'm doing right now," he says. But he adds: "I didn't leave Canada with the idea of not coming back."