France Just Issued Negative Yielding Debt -- Here's How it Impacts You

Author:
Publish date:
Video Duration:
0

Let's start with the facts. 

France issued 4.9 billion Euro's ($5.49 billion) of -0.13%  10 year bonds in late June, marking the first time in history that the country has done so. Sure, the European Central Bank, soon to be lead by former International Monetary Fund (IMF) head Christine Lagarde, is likely to lower interest rates. Eurozone inflation has decelerated in the past several years to just above 0% at times, as economic demand has weakened. German 10 year bunds currently sit at -0.36%. 

But there are clearly better yield opportunities around the globe. The U.S. 10 year treasury rate is at just above 2%. Even the Italian 10 year government is at 1.78%. Meanwhile, Eurozone inflation isn't yet negative. So who would buy these newly issued French bonds? 

"It's hard to justify why it's [the new French bonds] that negative," Marc Pfeffer, chief investment strategist at CLS Investments told TheStreet. 

Here's who is likely buying these bonds:

"I am assuming that there are certain entities that have no choice but to buy it," Pfeffer said. He said many of these buyers are "government institutions" who do not have a for-profit agenda, but rather an agenda to keep E.U. rates low to stimulate the weakening economies in the block. "If you're doing quantitative easing, you have no choice but to buy those bonds, with the goal of keeping yields artificially low and to stimulate those economies," Pfeffer said. "Are they going to get a return that's positive on this? Probably not, and I think they're okay with that." 

Jim Carney, founder and CEO of volatility trading hedge fund Parplus Partners, told TheStreet in May that some institutions in the EU are simply risk averse, given the poor economic trends. "They're not interested in getting the best return," Carney said. "They'd rather get nothing and lose to inflation than have the risk [of stocks]." 

How does this impact a U.S. stock portfolio? Many U.S. stocks have heavy European revenue exposure. The ones that do would see some level of support if EU rates stay low, stimulating business and consumer spending. There's more detail to come on these market dynamics. 

Sign up for the daily In Case You Missed It Newsletter Here.

Speaking of European bonds, check out what in the world is happening to Deutsche Bank, RealMoney's, TheStreet's premium sister publication, stock of the day. 

Jim Cramer's Take On the First-Half's Biggest Winners