Friday, November 22nd, 2019 MST

Negative interest rates are a serious problem

Incredibly, a bank in Denmark is offering home buyers 10-year mortgages at an interest rate of -0.5%.  Borrowers who opt for these mortgages will pay back less than the amount borrowed. This has come about because of the massive money creation by the world’s central banks.

Only last month the Fed cut its fed funds rate target to 2-2.25%, a quarter of a point.  And, it ended its quantitative tightening (QT) program two months early.  The purpose of QT was to drain excess money from the financial system.

Shortly after the Fed cut, the central banks of India, New Zealand, Thailand and the Philippines lowered their rates.  And, European Central Bank President Mario Draghi has hinted at further easing, which, undoubtedly, would probably deepen the bond market’s negative turn.

Outside the US, 43% of bonds are trading at negative interest rates.  Issued as government or corporate bonds, this debt has doubled since December and now totals $15 trillion.

Japan and seven major European governments, including Germany and France, can sell bonds with negative yields, as can corporate giants Nestlé and Sanofi, whose size gives investors confidence the companies could weather a downturn.

Negative yields on bonds first appeared in Europe in 2014 after the ECB drove interest rates below zero and began buying bonds to stimulate the economy. The promised return on Germany’s 30-year bond plunged below zero earlier this month for the first time ever.

Although yields on US government debt have plunged, they are not negative.  Yet analysts at Pacific Investment Management Co. and JPMorgan Chase have predicted that US Treasury bond yields could go to zero or lower if the United States tumbles into recession.

Negative interest rates are a serious problem.

Banks, insurance companies, and pension funds rely upon interest to meet their obligations.  They have to earn money on their investments.  Now — because of negative yields — depositors, policyholders, and retirees could see their retirements plans severely cut or even lost completely. Many insurance companies guarantee pension plans.

Worse, negative rates drive investors into risky investments in search of higher returns.  This, undoubtedly, is one of the reasons for the stock market’s rise to new highs.  It is also one of the reasons that gold and silver have renewed their bull markets in recent years.

The metals’ 6,000-years history makes them two of the better safe havens for the times ahead.

2 Responses to “Negative interest rates are a serious problem”

  1. niphtrique

    Negative interest rates are not a sign of central banks creating too much money. It is rather the opposite.

    Central bank create too little money or governments produce too little stimulus to produce the inflation needed to have positive interest rates.

    And apparently the big money prefers negative yielding bonds to gold. More than $15 trillion in bonds is already yielding negative.

    And so it might be a good idea to allow interest rates to go negative and let deflation kick in. The stimulus can come from negative interest rates so governments and central banks don’t have to step in.

    Reply
    • Bill Haynes

      “Negative interest rates are not a sign of central banks creating too much money.”

      Think about this. When CBs print, they buy bonds, which causes their prices to go and their yields to go down, now some $15 trillion worldwide already in negative territory. Further, when CBs disclose their intentions, as they are now doing, speculators on run ahead of the CBs and buy bonds only to sell them back to the CBs at profits.

      “Central bank create too little money or governments produce too little stimulus to produce the inflation needed to have positive interest rates.”

      How much more money would it take for inflation to set in? The Fed created right at $4 trillion 2008-2011, and other CBs printed also. The result is not yet hyperinflation but assets bubbles, such as in stocks, real estate, and bonds! When these bubbles burst, CBs will print still more money. Then the inflation will really set in.

      “And apparently the big money prefers negative yielding bonds to gold. More than $15 trillion in bonds is already yielding negative.”

      And, gold reached at six-year high.

      “And so it might be a good idea to allow interest rates to go negative and let deflation kick in. The stimulus can come from negative interest rates so governments and central banks don’t have to step in.”

      When interest rates are negative, there is no incentive for investors to buy bonds (except for capital gains). Pension funds, retired persons, and a host of other organizations have to earn interest to meet their obligations, many of which did their calculations years ago when interest rates were above the rate of inflation. With interest rates going negative, they cannot meet those obligations.

      Reply

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