Negative yields: Charting the surge in sliding rates

Negative yields: Charting the surge in sliding rates

Negative interest rates are extraordinary, flying in the face of conventional wisdom about how financial markets should behave.

So-called “real” rates, adjusted for inflation, had often been negative, but before 2009 it was not thought feasible for nominal rates to dip below zero.

But central bankers had to re-examine their orthodoxies in the wake of the global financial crisis of 2007-08. Unusual measures became necessary and all leading policymakers adopted some form of quantitative easing.

Crossing the zero bound

The Swedish Riksbank was the first to adopt a negative rate, in July 2009. It initially proved a brief experiment, but it gained currency as a potential tool during the eurozone crisis that began around 2010. 

Sometimes it was used as an explicit currency lever. Denmark used negative interest rates to deter capital inflows and ensure that the Danish krone’s peg to the euro could be maintained, while the Swiss National Bank took similar action to stem the franc’s rocketing appreciation.

Elsewhere, negative rates were used as an extension (albeit an extraordinary one) of traditional monetary policy tools to forestall deflation, encourage lending and nurture economic growth.

Ultra-low inflation became the main concern of the BoJ and the ECB

In Japan and the European single-currency area, their recoveries from downturns were notable for the absence of serious inflationary pressure as growth picked up. Instead, avoiding deflation — persistently falling prices — proved more of a concern for policymakers and provided the impetus for the adoption of negative interest rates. The Bank of Japan and European Central Bank hoped to force commercial banks to lend more by charging them on their deposits at central banks. 

Central banks covering almost a quarter of the global economy have set negative rates

Including Japan and the eurozone, countries that account for almost a quarter of total global output now have central banks with policy rates set below zero.

The trends in short-term official rates have been mirrored in the sovereign bond market. Several major economies have seen yields on even long-term debt turn negative.

The entire German yield curve is negative

Fears over the health of the world economy, stirred by an escalation in the trade war between the US and China, have expanded the universe of sub-zero bond yields. These worries have pushed investors into safe assets, raising prices of government bonds and thereby depressing their yields.

Even the US Federal Reserve has trimmed interest rates in light of the rising uncertainty, which was the 729th rate cut by global central banks since the financial crisis, according to Bank of America. But worries that the Fed was not planning to cut rates aggressively enough exacerbated concerns that policymakers were not doing enough to avert a downturn and poured fuel on the global bond rally.

Bonds have sub-zero returns out to 15 years’ maturity in Japan, France, Sweden and Belgium, out to 20 years in Denmark, 30 years in Germany and the Netherlands and an astonishing 50 years in Switzerland. In the case of Germany, it has become the largest economy where its entire yield curve is trading below zero.

High returns are rare in the post-crisis world

Figures from the ICE database show that roughly a quarter of the global bond market — including both government and corporate debt — now trades at sub-zero yields. 

The problem faced by investors searching for yield in the post-crisis world is evident in the chart. Only 3 per cent of the global bond market now yields more than 5 per cent — the lowest on record.

A global recession could push more debt into negative territory

In the event of a worldwide downturn, central banks would cut policy rates even further to buttress growth. But even a decade after the global financial crisis, rates remain at, or near, historical lows, giving little room for policymakers to manoeuvre. 

Cuts of the magnitude seen in the 2007-2009 period would leave all the G7 group of major economies with negative rates. 

Analysts reckon there is probably a limit to how low negative interest rates can go. This is because of the damage sub-zero rates might inflict on the financial system and because at a certain level, it would become more cost-effective for investors to hold cash and store the money physically. 

But in a sign of how entrenched the phenomenon has now become, some analysts are openly speculating whether yields on US Treasuries, the world’s biggest and most important bond market, could also turn negative. 

“Whenever the world economy next goes into hibernation, US Treasuries — which many investors view as the ultimate ‘safe haven’ apart from gold — may be no exception to the negative-yield phenomenon,” Joachim Fels, of Pimco, wrote recently. “And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.”

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