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Bernanke, not so long ago, stunned a reporter with an anecdotal quip in response to the question, when can we expect to see a more normalized fixed-income world? "Not in my lifetime," he replied. Hmmm, funny he never characterized that view with anything he said while he chaired the Fed. Looks to me we're headed further and further from that reality. Why? When currencies (and the cost of money) are continually mis-priced, how can markets be free to distribute capital where it needs to go?Global markets have capped a tumultuous start to the year with a record amount of outstanding government debt at negative yields, reflecting heightened investor pessimism over the outlook for economic growth and inflation. [...] Negative yields, once considered an improbable theory, now account for one quarter of JPMorgan’s index for government bonds as global central banks adopt increasingly abnormal policies to ward off the threat of deflation, leading to a rally in government bonds. Market interest rates fall as prices rise, resulting in a bizarre scenario in which rates have fallen below zero and investors are paying governments to hold their money.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
Is the metric in the article talking about real interest rate (which can go negative if the nominal rate for a bond is less than the inflation rate)? All that means is that the investor in such bonds is losing money to inflation holding those bonds. But then if the bond holder's currency was depreciating faster than the nominal value then it makes sense for people to hold a bond with negative real rates (or even negative nominal rates) to lose less of their cash position and without taking on risk. Negative rates aren't the armageddon people make it out to be. Just a psychological tick on a graph.
BoJ decision had nothing to do with those rates. They changed interest rates only to excess reserve deposits held at the bank. How many of the people talking about NIRP as the natural progression of this are confusing target rates with deposit rates? Nothing forces a bank to lend to another at a negative interest rate, so no central bank can force that.
Edited to add: As an appreciating currency, there would very little appetite for dollar holders to buy dollar denominated bonds if rates were negative. People would just hold the currency. Not the same for Yen or Euro. This is also the reason why banks even in Europe do not impose negative savings rates on retail customers. They would be afraid of people just hoading cash and losing deposit. The one anecdotal example of a bank having to provide a negative rate on a mortgage was because the rate was tied by the terms (badly it seems) to Libor and so when Libor went low, their mortgage rates had to go negative. They chose to reduce the mortgage capital instead. But this was an exception rather than the rule.
In the US, retail borrowing rates are typically tied to Prime which is correlated with Fed Funds but not same. First, the financial institutions are unlikely to lend to each other at negative rates with a strong dollar and even if they did, the cushion above prime for most of these borrowing rates is high enough that Prime would have to go deep into negative territoty before the consumer borrowing rates went negative. Consumer deposit rates would hurt banks but they would not go negative on this banks because it would cause a run on the banks hurting them. So they will absorb the costs if it came to that.
The biggest concern here would be that this might drive the nominal rates of very short term bonds of the type held in Money Market funds so low that they couldn't even make back the administrative costs and so break a buck causing a run for redemptions that would snowball. abernanke seems to think this was a concern during the last crisis but not any more.
Why is interest still being paid for "excess cash" reserves???
I can't find my saved list of depositors......tis at the Fed. site somewhere, too.
https://en.wikipedia.org/wiki/Excess_reserves
http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
Have not posted this for some time, so will place here again.
This is the 10 year bond list for major government issues, globally.
This page is not over populated with links and junk, and one will find a few clickable tabs near the page top and an interesting choice of topics along the right edge, including a "view" by country clickable.
http://www.tradingeconomics.com/bonds
Regards,
Catch
http://www.bloomberg.com/news/articles/2016-02-02/rates-less-than-zero-is-bank-stress-fed-wants-to-test-in-2016
To get some ideas about what might happen, perhaps the best place to go would be Europe, from people who are already "living the dream".
Just wait until corp bonds go negative, too:
http://www.bloomberg.com/news/articles/2016-02-02/deutsche-bank-s-jim-reid-just-wait-till-corporate-bonds-go-negative-too
Big quote from Jim Reid piece:
http://ftalphaville.ft.com/2016/02/02/2152019/corporate-bond-yields-and-the-cold-pull-of-negativity/#respond
https://notayesmanseconomics.wordpress.com/2016/02/02/will-the-spread-of-negative-interest-rates-lead-to-a-ban-on-cash/
pension obligations
insurance co's / annuities, etc. long-term liabilities
criminals and their machinations
ban on cash entirely @ retail level
[comment section on this site is often good, and well-supported by the blogger himself]