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Here’s Why Janet Yellen Should Be More Worried About Negative Rates

It’s been a big week in the global bond market with the German 10-year bund yield falling below zero for the first time ever, Swiss 30-year debt flirting with negative territory, and U.S. Treasury yields falling to the lowest levels in 16 months.

Currently, more than $10 trillion worth of sovereign debt carries negative yields, according to Fitch Ratings. Another $500 billion of European corporate debt is yielding less than zero as well, according to Reuters.

This is not the natural order of things. Bonds are designed to give investors a positive rate of return, and bond yields are used by sophisticated investors to determine the risk-reward of nearly every asset class. If the interest rate being used in a discounted cash flow analysis is zero or below it, it makes the price of any asset—real estate, stocks, a business—impossible to value with any certainty, at least not in the ‘normal’ way.

Janet Yellen was asked about the global phenomenon of negative interest rates during her press conference on Wednesday. Her answer was classic Fed-speak, a descent into arcane wonkiness that would’ve made Alan Greenspan proud.

Global yields are falling because “market expectations of short-term rates remain low,” Yellen said. “And the term premium, or extra yield, investors demand to hold long-term security is also low.” (The WSJ’s Greg Ip reports term premium has historically averaged 0.5 to 2 percentage points but it is now negative 0.6 of a percentage point in the U.S., negative 1.6 points in Germany and negative 1.7 points in Japan, according to data from Cornerstone Macro.)

Yellen also mentioned the quantitative easing programs of the Fed and Bank of Japan as factors but her answer essentially dodged a critical question. Nothing to see here folks, keep moving.

But as global bond yields keep moving lower, many financial market participants are growing alarmed.

Janus Capital’s Bill Gross, aka ‘the Bond King’ recently Tweeted that negative yields are like “a supernova that will explode one day.”

On one level Gross is warning people who think they are putting money in a ‘safe’ place that they are really taking a lot of risk. Bonds with negative yields will indeed become toxic securities if inflation rates ever start to rise.

But there’s more at stake here than what happens to fund managers buying debt with negative rates, much more.

Germany’s descent into sub-zero territory, along with and a general drop in global bond yields, is being driven most recently by fears that British citizens will vote to leave the Eurozone. Recent polls show the “leave” camp gaining steam ahead of the June 23 Brexit vote. Those polls, though, were conducted before Thursday’s assassination of British PM and vocal “remainer” Jo Cox, which prompted a cessation of campaigning on the issue, at least some guessing that would swing some voters to the “remain” side. (Read: Killing of British Lawmaker Has Thrown the ‘Brexit’ Vote into Limbo)

Brexit is one of those “risk off” events that is spooking financial markets, including the U.S. stock market. Nobody really knows what will happen, since no country has ever voted to leave the EU before.

But negative rates are about much more than Brexit. It’s about the fact the global economy remains on very shaky ground despite years of enormous central bank efforts, especially from the U.S. Fed and Bank of Japan. The fear is that central bankers are really pushing on a string here—unable to re-inflate global growth, no matter how much huffing and puffing they do.

Following Yellen’s admission this week that “long-lasting or persistent” factors are dragging down global growth, WSJ’s Ip writes: “An aging population, slow [global] productivity growth, and the self-perpetuating pessimism that depresses business investment are much tougher challenges to overcome” than the short-term headwinds Yellen has previously cited. Ip concludes that “the verdict of the bond market is that they won’t be overcome soon.”

In other words, the world’s descent into negative yields is the bond market’s warning that the global economy is being sucked into a deflationary vortex, one that policymakers really can’t do much to stop.