Interest rates are turning dangerously negative
How does this sound?
Give me your money. I’ll hold on to it for a few years and skim a little off the top. Then I’ll give you back less than you originally gave me.
No thanks… right? Well, in the bizarro world of central banking,investors all over the world are doing exactly that—because of negative interest rates.
What are the world’s central bankers smoking?
There were three major events last week:
The European Central Bank went “all in” with negative interest rates and lowered its key overnight deposit rate from minus 0.3% to minus 0.4%. The ECB also expanded its quantitative-easing program by an additional €20 billion per month.
In Japan, the government gets paid to loan money. For the first time ever, the Japanese government sold US$19.4 billion of new 10-year bonds with an interest rate of 0.1% at the average price of ¥101.25, producing a negative yield of minus 0.024%.
Lots of government debt already has negative yields, but for the first time ever, a corporation was able to sell a new bond issue with negative interest rates.
German mortgage bank Berlin Hyp AG was selling a €500 million (US$550 million) 3-year bond at a yield of minus 0.162% last week.
Overall, there is $7 trillion of negative-yielding debt in the world, which equals 29% of the Bloomberg Global Developed Sovereign Bond Index.
I’m not talking about backwater, third-world countries either—I’m talking about central banks from developed countries like Switzerland, Sweden, Japan, Denmark, and the European Central Bank.
Don’t think for a minute that negative interest rates can’t happen here. For a short time in 2008 during the Financial Crisis, yields on US Treasury bills actually turned negative.
Nervous investors bought Treasuries with such force that prices soared and yields dropped into negative territory.
When things get ugly, the Wall Street crowd has demonstrated that it is willing to lose a small amount of principal in exchange for safety.
Sadly, I think the outlook for conservative, risk-averse retirees who depend on portfolio income to survive is pretty darn bleak if they continue to invest in fixed-income securities like bonds and CDs.
The fixed-income rules have changed, and the only way to generate any substantial portfolio income is going to be with stocks that pay generous dividends.
“Give me your money. I’ll hold on to it for a few years and skim a little off the top. Then I’ll give you back less than you originally gave me.”
we are now living in upside down world..
“Overall, there is $7 trillion of negative-yielding debt in the world, which equals 29% of the Bloomberg Global Developed Sovereign Bond Index.”