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Hey Americans, Your Retirement Fund Is Full of Negative Yield Bonds

Last Updated September 23, 2020 1:31 PM
Ben Brown
Last Updated September 23, 2020 1:31 PM
  • One of the most popular exchange-traded funds (ETFs) in America has an enormous holding of negative-yielding bonds.
  • The Vanguard Total International Bond ETF contains negative-yielding government bonds from Germany, Japan, and France.
  • There’s a good chance you inadvertently hold this ETF in your 401k or other passive retirement funds.

This might shock you, but there’s a good chance you’re holding a ton of negative yielding bonds in your retirement account without knowing it. Yep, one of America’s most popular exchange-traded funds (ETF) is packed full of negative yield bonds from Germany, Japan, and France. And it’s creeping into 401ks all over the country.

Peter Boockvar, chief investment officer at Bleakley Advisory brought attention to the crazy notion on Twitter .

“Who in their right mind is buying negative yielding bonds you ask? Americans, many I’m sure in their 401k, via the Vanguard Total International Bond ETF, ticker symbol BNDX. Its biggest holding is a German bund maturing on August 15th 2029 and currently yielding -.29%.”

Who the hell buys negative yielding bonds?

It turns out, everyone does. There is now $11 trillion in negative yielding debt on the planet  (down from $17 trillion last year but still at historic highs).

global negative yield debt in your retirement fund
After peaking at $17 trillion, negative yielding debt sits at $11 trillion globally. Source: Bloomberg

The ten year bonds in Germany, Japan, and France all return less than zero. In other words, when you buy a German bond, you are paying the government for the privilege of lending them money.

This is completely topsy turvy. You’re supposed to be rewarded with a yield for lending money.

So why do people buy them? The simple answer is global uncertainty.

“Investors are willing to pay a premium—and ultimately take a loss—because they need the reliability and liquidity that government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth” – Bloomberg.

Not only that, but many institutions are required by law to hold a certain percentage of them. They’re flat-out forced to buy negative yielding debt.

How did negative yield bonds get in your retirement portfolio?

But wait, negative yields are common across Europe and Asia where the central banks turned to negative interest rates. But the U.S. doesn’t have any negative yielding Treasury bonds. So how do negative yields end up in your portfolio?

Through one of the many ETFs that track international bonds. Primarily, the Vanguard Total International Bond ETF (NASDAQ: BNDX) .

negative yield bonds ETF
The Vanguard Total International Bond ETF holds almost 40% of its assets in countries with negative yielding sovereign bonds. Source: Vanguard

The ETF’s largest holding  are bonds in Germany, Japan, and France (39.9% of the portfolio). Here are the yields on their respective government bonds:

All negative.

And it’s huge. The ETF holds $144.6 billion of assets. At one point last year, the BNDX ETF saw the largest inflow of funds of any ETF on the market. American brokers were pouring money into it for safety when everyone was worried about a recession.

Negative yields are a product of the bizarre, experimental foray into central bank negative interest rates. The Federal Reserve may not follow Europe and Asia into negative territory just yet, but the effects are sneaking into your retirement portfolio already.