On “Negative” Interest Rates

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ArtBy Arthur Chalekian GEPC

[Financial Consultant]

Are markets suffering from excessive worry?

Last week, markets headed south because investors were concerned about the possibility of negative interest rates in the United States – even though the U.S. Federal Reserve has been tightening monetary policy (i.e., they’ve been raising interest rates).

The worries appear to have taken root after the House Financial Services Committee asked Fed Chair Janet Yellen whether the Federal Reserve was opposed to reducing its target rate below zero should economic conditions warrant it (e.g., if the U.S. economy deteriorated in a significant way). Barron’s reported on the confab between the House and the Fed:

“Another, equally remote scenario also gave markets the willies last week: that the Federal Reserve could potentially push its key interest-rate targets below zero, as its central-bank counterparts in Europe and Japan already have. Not that anybody imagined it was on the agenda of the U.S. central bank, which, after all, had just embarked on raising short-term interest rates in December and marching to a different drummer than virtually all other central banks, which are in rate-cutting mode.”

Worried investors may want to consider insights offered by the Financial Times, which published an article in January titled, “Why global economic disaster is an unlikely event.” It discussed global risks, including inflation shocks, financial crises, and geopolitical upheaval and conflict while pointing out:

“The innovation-driven economy that emerged in the late 18th and 19th centuries and spread across the globe in the 20th and 21st just grows. That is the most important fact about it. It does not grow across the world at all evenly – far from it. It does not share its benefits among people at all equally – again, far from it. But it grows. It grew last year. Much the most plausible assumption is that it will grow again this year. The world economy will not grow forever. But it will only stop when…resource constraints offset innovation. We are certainly not there yet.”


Markets bounced at the end of the week when the Organization of Petroleum Exporting Countries (OPEC) indicated its members were ready to cut production. The news pushed oil prices about 12 percent higher and alleviated one worry – for now.

NY Fed Reserve Bank


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One Response

  1. Negative IRs

    The German 10-year is on the verge of going negative in what is now a disturbing global move, and one that cannot be explained only by central bank action. If the cost of capital has no cost, the entire financial system fails because everything is built on the risk-free rate.

    Last week, the movement in bonds became more troubling than in the recent past. While the “stealth bull market” I referenced looked set to persist on emerging market and small-cap strength, the problem now is that the global yield crash is warning of something severely wrong. That crash accelerated last week. Oil’s move should have resulted in bond yields cracking to price in rising cost-push inflation from the global commodity rally. Instead, that commodity move seemingly has had no impact
    Here in the US, the yield curve has pushed to new expansion lows. This despite the Fed “raising” rates when in fact all rates, including long duration US rates, have fallen aggressively since.

    Why is this happening?

    We will only know with hindsight, but perhaps the whole “Brexit” thing is legitimately scaring the marketplace. I don’t believe this is the sole reason though. We are either in the final stages of a bubble in bonds, or we are in the final stages of a bubble in stocks if bonds are right.

    Strange world we live in

    Very near-term this significantly muddies up volatility visibility. With long duration Treasuries outperforming intermediate (an important indicator as referenced in our award winning paper), conditions near-term may get ugly and abruptly reverse everything that has happened since the February lows.

    False positive? Type 1 error? Maybe – but history suggests that when bonds act this way, it is worth paying attention to and being concerned about.

    Michael A. Gayed CFA


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