French Bonds: Proof That the World Has Gone Crazy

A magician’s job is to make you believe the impossible for a brief moment in time.

It seems that Central Bankers have taken up the mantle of the magician.

For a long time we’ve been expected to believe the impossible: that wealth can be poofed into existence with a keystroke and an abracadabra.

We’re also expected to be happy with inflation adjusted negative yields on our “safe” bonds. 

But recently something happened in France that simply defies explanation – except to say that the whole world of international finance is completely cuckoo for Cocoa Puffs.

I’m referring to the recent French bond auction. Normally – as you may know – sovereign bonds (like U.S. Treasuries) pay a small yield. That small yield goes along with the perceived safety of such bonds. That’s because a bond yield is basically a risk premium.

The higher the odds of you getting your principle investment returned to you on maturity, the lower the yield you’ll receive.

But this recent French bond auction of six-month securities was much lower than normal. It wasn’t 1%, or even a half percent. It wasn’t one quarter of a percent. It was even lower than U.S. Treasuries of the same maturity, which yield just 0.14%.

The yield?

Negative 0.006 percent.

That’s right, negative – as in, at the bond’s maturity in early December, you’ll receive your principle investment minus 0.006%.

So if yesterday you bought a $100, six-month French treasury, you’ll receive $99.99 on December 9.

A guaranteed loss.

Why bother? Why not just hold the cash?

And who are these people buying a bond at negative yields?

I could take an educated guess at the answers to these questions – but in reality, why does it matter?

When the world of finance is so topsy-turvy that people are willing to take a guaranteed loss on their investment – why try to get at the heart of their insanity?

Take solace in knowing that this type of upside-down behavior can not last long.

I believe we’ll see a strong reversal of negative interest rates – and a rush to other assets away from phoney-baloney sovereign debt and towards real, hold-in-you- hand assets like gold and silver.

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