Bonds with negative real interest rates are held up as supporting the case for equities. Yet, this ignores the fact that yields are low due to weak growth expectations, which ultimately will hit shares.
One of the growing themes in the financial world at the moment is the surge in the number of bonds with negative interest rates, where the bondholder pays to hold the bond rather than being paid to do so. There are over $12trn of bonds across the world which now have negative yields to maturity.
The stock market seems to love this. It reinforces the view that shares offer higher yields than bonds, so where else can you put your money? This trend has been akin to a free lunch over the last decade, but this will only continue to work as long as company profits hold up. When buying individual shares, therefore, it is crucial to consider where future revenue and earnings growth is going to come from and if this justifies the share price.
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