Low interest rates do not deter investors: they are buying bonds in record amounts. Experts warn that investors have overlooked the risks.

Frankfurt.

Bond markets are in turmoil. Investors are buying fixed income at unprecedented levels. The surge is reflected in the fund business. Worldwide, investors bought bonds worth a net $479 billion in the first half of the year. “It’s a record,” said Ali Masarwa, a ratings analyst at Morningstar.

Early data for July shows that the enormous demand continues. Bond products are in greater demand than ever on European stock markets.

Bonds suddenly appear to investors as worthless. Last year, the situation was completely different. It seemed that all signs pointed to a sustained rise in interest rates in the US. This would mean losses on existing bond positions.

But there was a dramatic shift in sentiment. The escalation of the trade dispute between the United States and China heightened recession fears. Under psychological pressure, stock markets collapsed at the end of last year.

That’s why safe systems are needed in the new year. For three reasons: due to stock losses, recession fears, and central bank reactions. Major central banks have signaled that they will combat recession with monetary policy. Felix Herrmann, investment strategist at the largest asset manager Blackrock, acknowledges “a strong shift into safe havens, such as German, Swiss, and Japanese government bonds.”

Some examples show how events have changed the previous normality of more leisurely market movements. Well-known asset manager Jens Erhardt mentions two unusual movements. Two years ago, Austria issued a 100-year bond with a 2.1 percent coupon. The bond’s price has since doubled.

Even more striking: in March of this year, the state of North Rhine-Westphalia issued a bond with the same duration and annual distribution in a similar amount. Within just a few months, the bond gained two-thirds of its value.

When market rates fall, prices of these bonds with extremely long maturities rise impressively.

In such conditions, even negative interest rates do not deter investors. A ten-year federal bond now yields a record minus 0.7 percent. Herrmann calculated: “Currently, 60 percent of the European government bond market is in negative territory.” Worldwide, this applies to bonds amounting to more than $15 trillion. Anyone who buys such bonds and holds them until maturity will incur a guaranteed loss.

Against this backdrop, the recent investor surge is astonishing, at least at first glance. “If market yields are so low or even negative, there is only one reason: speculation about further price increases,” says Tatiana Greil-Castro, a bond specialist at asset manager Muzinich & Co. in London. When market rates fall, prices of bonds with negative yields also rise.

Therefore, Muzinich’s expert believes that “the surge in bonds will continue.” If the global economy goes into recession, investors will seek protection in government bonds, Greil-Castro believes.

Blackrock strategists also see a potential increase in value, claiming that they are slightly different. “If the European Central Bank launches a new bond-buying program in September, we will undoubtedly see further price increases,” says Herrmann.

Muzinich’s expert adds that major investors, in particular, need somewhere to invest. Therefore, she does not believe in the imminent end of the crazy world of negative interest rates: “This absurdity may accompany us for years.”

Investments in real estate/business in Germany, Austria, USA.

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