Negative Rates, Falling Bond Yields: Time to Consider Bitcoin

With high market uncertainty, low inflation, and negative interest rates in many countries, it’s becoming harder for investors to ignore Bitcoin, which is one of the very few investments these days to offer an alternative to further losses.

Also read: Brexit and Bitcoin and Gold…Oh My!

Bond Yields Going Negative Globally

Amid recent market turmoil following Brexit, slashing of forecasts and credit ratings, investors have been moving into safe government debt causing yield of fixed income investments in the U.S., Europe, and Japan to plummet. The more investors buy bonds, the higher the prices and the lower the yields.

Negative yields are now quite common for government bonds. According to Citigroup, Swiss government bonds with the longest maturity now have negative yields, as are almost 80% of Japanese and German government bonds. Negative-yielding sovereign debt in Italy amounts to approximately $1.6 trillion worth while the country is in a banking crisis, struggling with bad debt and non-performing loans (NPLs) worth €360 billion ($400bn).

According to Bank of America Merrill Lynch, there is currently $13 trillion of global negative-yielding debt. This is a significant increase from only $11 trillion before the Brexit vote and almost none in mid-2014.

In the US, yields on the 10-year Treasury note declined to a record low of 1.366% on Friday even though the job report shows strong growth. Elsewhere, Lithuania’s 10-year government debt’s yield has more than halved this year to roughly 0.5%. Taiwan’s 10-year bonds are not doing much better, with yields falling to about 0.7%. New Zealand’s 10-year-bond are slightly better offering 2.3% yield to investors.

Investors Willing to Take On Higher Risks

To compensate for falling sovereign debt yields, investors have been looking into emerging markets and riskier bonds. Head of emerging markets at Invesco, Rashique Rahman, said that his firm’s institutional clients in Western Europe and Asia are now interested in buying investment-grade emerging-market debt to help raise yields in their portfolios. Unlike before, investors do not care who the debt issuers are, he said and added that:

“They just want a higher yield.”

HSBC Global Asset Management sees the same trend. Ricky Liu, a high-yield-bond portfolio manager at the company, said his firm’s clients from Asia are, for the first time, willing to invest the highest-rated junk bonds. According to Bank of America Merrill Lynch, emerging-market debt funds saw their highest inflow on record in the week ending July 6.

Worse to Come

The situation may be getting worse as credit-rating firm, Fitch Ratings, warned that there would likely be a record number of downgrades of sovereign credit ratings this year. Fitch has already downgraded 15 nations in the first half of the year. This is a significant move considering the previous high in 2011 during the Eurozone crisis was only 20 downgrades for the whole year. Also, any changes such as changes in monetary policy or increases in interest rates could cause further deteriorate bond yields.

Time to Consider Bitcoin

Meanwhile, Bitcoin continues to gain more interest from investors as a safe-haven investment. During the turbulent market after the Brexit vote, bitcoin investors were immune and enjoyed a 9% increase in the value of their bitcoin holdings. Ashvin Bachireddy, co-founder and general partner at Geodesic Capital, a Silicon Valley venture capital firm that backed bitcoin start-up 21 Inc., said after the Brexit vote that “Bitcoin is effectively becoming digital gold.”

Bitcoin exchange Kraken saw the volume of bitcoin trading double in the 24 hours following the Brexit vote, and five-fold bitcoin-to-euro trading before the vote since June 10. Kraken’s CEO Jesse Powell told CNBC that he “wouldn’t tell anybody to put their life saving into bitcoin because that could just as easily be wiped out.” But, he also added:

Think about it in terms of diversifying your portfolio. If you have investments in gold or an index, maybe think about bitcoin or cryptocurrency as an asset class you want to have some money in.

Steve Waterhouse, a partner at San Francisco-based bitcoin investment firm, Pantera Capital, said that investing in bitcoin makes sense in some situations. He said:

If nothing else looks safe, you could see people looking to something completely different as a safe haven[…] It doesn’t follow the ups and downs of regular markets.

While there are advantages to having bitcoin in an investment portfolio, it is not without risk. This is why bitcoin is great as an asset to diversify a portfolio with, so that when bond yields are falling, there are alternative investments that do not move in the same direction.

Do you think investors should diversify their portfolios with bitcoin? Let us know in the comment section below.

Images courtesy of Schroders, Fitch Ratings, HennionandWalsh