Negative interest rate bonds could soon be coming to the United States.
Though it may seem counter-intuitive, negative interest rates are not unheard of. In Europe, negative interest rates have been normal for quite some time, with Switzerland’s central bank enacting a negative excess reserve rate after the financial crisis to encourage financial institutions to loan out their money instead of holding it. Other European countries have followed suit, and some investors even buy negative yielding bonds speculatively in anticipation of bond yields falling further.
The United States is actually behind the curve in many aspects. For example. during the financial crisis, Congress granted the Federal Reserve the authority to give interest to banks who held excess reserves in the Federal Reserve above reserve requirements. Instead of charging a negative rate like Switzerland to encourage spending, the Fed enacted a positive rate of .25%, arguing that it would encourage banks to be safer and safeguard against anymore bankruptcies. To no one’s surprise, deposits within the Fed jumped from $10 billion to over $2 trillion, worsening the credit crunch in financial markets. As a result, the Federal Reserve enacted round after round of Quantitative Easing, trying to get banks to loan out the trillions in dollars the Federal Reserve had just created for them. Now that banks are finally loaning money and turning a profit, it seems that the US government wants in on the action. Besides the benefit the government gets from having higher inflation rates, the government debt load also benefits from lower rates. Just this past month, the United States entered the “0% club” for the first time by issuing a 3 month treasury at 0% interest (yes, someone actually bought it). Interest rates have been hovering near all time lows since the financial crisis, but this is the first time the government actually received an interest free loan.
This begs the question: If someone is willing to give the government a loan for free, would someone also be willing to pay to give the government money for an investment? The short answer: maybe. The bond market is driven by a multitude of factors, and for interest rates to reach negative yields there must a perfect storm of these factors. These two things need to happen for interest rates to be negative in the United States:
