World Economy

As Bond Yields Fall, Investors Turn to Fine Art

As Bond Yields Fall, Investors Turn to Fine ArtAs Bond Yields Fall, Investors Turn to Fine Art

It is surely no coincidence that at a time when the international art market is abuzz with the scandal of a near $25 million profit from the sale of a single Modigliani painting, Switzerland last week became the first country ever to sell 10-year bonds with a negative yield.

The scandal in the art market centers on a Modigliani painting, Nu Couche au Coussin Bleu, which the Swiss art broker Yves Bouvier acquired from US hedge fund owner Steven Cohen for $93.5 million, AP reported.

Bouvier then onsold the painting to Dmitry Rybolovlev (a Russian oligarch who made his $8 billion fortune from potash) for $118 million, reaping a profit of close to $25 million.

Two months ago, Bouvier was arrested in Monaco and charged with price fixing and money laundering – charges which he denies – before being released on €10 million ($13.8 million) bail.

But while the case no doubt illustrates the lack of transparency in the international art market – which is now estimated to have an annual turnover of more than €50 billion, up from about €20 billion a decade ago – it also highlights the hefty premium that investors are now prepared to pay for assets that allow them to preserve, and even enhance, their wealth in an era of ultra-low interest rates.    

  Extraordinary slump

While Switzerland last Wednesday became the first government in history to sell benchmark 10-year debt at a negative interest rate, other countries are likely to quickly follow suit. Already, Berlin is able to borrow at negative rates for up to seven years, while Paris can borrow at negative rates for up to four years.

This extraordinary slump in European bond yields largely reflects the European Central Bank’s massive bond-buying program, known as quantitative easing, or QE. Under this program, the ECB has committed to buying €1.1 trillion worth of bonds issued by eurozone governments, which has the effect of pushing bond prices higher while sending bond yields lower.

No doubt this is great news for eurozone governments, which are now able to borrow at much cheaper interest rates. For instance, Spanish 10-year yields have come down from 4.1 percent in early 2014 to 1.2 percent at present, while Portuguese yields have dropped from 5.5 percent to 1.6 percent.

Lower yields not only make the debt levels of the peripheral eurozone economies more sustainable, they also reduce the risk of contagion from a possible Greek debt default.

But QE’s effects are not confined to the bond markets. The ECB’s easy money has also helped to push European sharemarkets sharply higher, with bourses in Germany, France, the Netherlands and Italy all up by more than 20 percent so far this year.

And as investors respond to low European yields by shifting money to other countries such as the United States, the euro has tumbled, much to the delight of European exporters, who are benefiting as their products become more competitive in global markets.