Negative Interest Rates

Would you loan money to someone at negative interest rates? I’m sure your first answer is, “No!” Or perhaps your answer is a question, “What is a negative interest rate?” Let me explain.

There is somewhere between $15 trillion and $17 trillion of bonds globally that bear a negative interest rate today. A ten year German bund (government bond) yields -0.6%. A ten year Japanese government bond yields -0.3%. That means you are buying the bonds at a higher price today than what you will receive at maturity. A positive interest rate, by contrast, means you get all your money back plus interest along the way.

How did negative interest rates become a thing? Governments around the world sought to stimulate their economies by driving interest rates lower and lower. Eventually rates went negative. Investors (including institutions and businesses) tolerate it because they need the stability of the government bonds. High quality government bonds are often the safest investment around. If you know you will need the money at some date in the future, you need some stability.

In the U.S. we still have positive interest rates, but it is possible that we see them turn negative at some point. That causes me to ponder what I would do. Would I buy a bond with a negative interest rate? It depends on what my alternatives are and on how much I need the stability. I wouldn’t like it, but I won’t rule it out. Let’s hope we don’t get there.