Friday, October 7, 2022

Can negative bond yields last?

If bond yields are less than inflation ("negative real interest rates"), there is an arbitrage opportunity: borrow money in the bond market (at 3% in the graph above) and invest it in an asset (stocks, housing, gold) whose price will increase with inflation (8%).

This kind of arbitrage increases demand for borrowing, driving up the price of borrowing (the yield), until bond yields are driven above the inflation rate.  

You can probably make money if you know when this will happen.  


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