El-Erian: "10 Things to Know About Negative Bond Yields"

From Bloomberg:

As yields on German bonds plunged further yesterday, with some maturities closing at record negative levels, the worldwide trend toward ultra-low interest rates remains largely intact. Yet the causes and implications of this movement are quite complex. Here are 10 things to know, from the well understood to the speculative.
Less Than Zero

1.  Although German bond markets are leading this historical phenomenon -- more than 30 of the 54 securities in the Bloomberg Germany Sovereign Bond Index are at negative yields -- other European government markets also are increasingly seeing ultra-low yields dip into negative territory. JPMorgan has estimated that as much as 1.5 trillion euros ($1.7 trillion) of euro-zone debt trades with negative yields in a growing number of countries, including Austria, Denmark, Finland, Germany, the Netherlands and Switzerland. Moreover, this isn't limited to the secondary market; some countries have issued debt at negative yields.
2. “High quality” European fixed income markets aren't unique in experiencing an extraordinary period of ultra-low yields. Peripheral government bonds, such as those issued by Italy and Spain, have been trading at record low yields, as have corporate securities issued by companies such as Nestle and Shell.
3.  The seemingly illogical willingness of investors to pay issuers to borrow their money is neither irrational nor driven by just noncommercial considerations (such as regulatory requirements or forced risk aversion). As the European Central Bank prepares to start its own large-scale purchasing program next week, some investors believe they could make capital gains on such negative yielding investments.
4. There are many immediate reasons to justify this investor optimism. The impact of the ECB’s quantitative easing program (whose scheduled purchase of government bonds is likely to run into a relative scarcity of supply) is amplified by still-sluggish growth, “low-flation” and the threat of deflation. Geopolitical developments also play a role, along with messy national and regional politics in Europe....

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