If Europeans don't want negative yields, here are the choices.
How European investors react to ultra-low yields will determine how the euro performs next.
Most investors who are forced into bonds don't have a choice. Insurance companies and pensions need to hold bonds for fiduciary purposes. But others are looking at alternatives.
First, the scale of the problem is massive. German 2-year yields now yield -0.277% and 5-years are at -0.13%. French 5-year notes yield 0% and the governments of Austria, Belgium, Finland, Ireland and Holland are all being paid by investors on notes with maturities of 2 years or longer. The world of negative-yielding bonds is in the trillions.
1) Cash in a bank or on hand. This is unrealistic for a few reasons. First is that we're talking about some huge numbers here and there is solvency risk regarding banks. Second, there is a negative deposit rate at the ECB and banks can pass that on. Alternatively, securing that much physical cash is problematic and it wouldn't be 'liquid' in that it would take some time to get it into the banking system if you wanted to do something with it.
2) Higher yielding investments. Go down the ladder into regional or highly-rated corporate debt. This is clearly the most popular choice in the US but the world of non-government debt is much smaller in the Eurozone.
3) Stocks. The people buying government bonds aren't generally interested in the kind of volatility in stocks but they might be convinced by hefty dividend yields and share prices rising to records, like the French CAC did today.
4) Convert to another currency. Compared to negative yields, a 1.36% return for a 5-year Treasury doesn't seem so bad but if you're risk averse and just saw the euro fall 20%, perhaps Eurozone stocks seem less risky.
Ultimately, there is room for all of them but Eurozone stocks are very compelling, especially since the returns in Japan and the US after QE. But if the euro keeps falling or if Treasury yields rise, the equation gets more compelling.
US 10 year yields vs EURUSD
