U.S. Interest Rates Dip Below Zero

Chris Gaetano
Published Date:
Mar 25, 2020

Negative interest rates have finally come to the United States, as yields on short-term Treasury bills have now dipped below zero, meaning that buyers are guaranteed to lose money on their initial investment, according to CNBC.

While this is the first time such a thing has happened in the United States, negative yields on sovereign debt is not a new pheneomenon, with several other countries having reached this point since at least 2016. The amount of outstanding bonds with negative yields, as of this past August, is $15 trillion worldwide. Negative yields have been going on for so long in so many countries (mostly large parts of Europe plus Japan), that certain banks had started to take their cues from those yields: Major banks in Switzerland and Denmark in October have been charging fees to depositors just for keeping their money there.

CNBC said that the United States' dip into negative yields is not the direct product of a specific central bank policy but, rather, is reflective of surging demand for Treasury bonds, as prices and yields often move in opposite directions. Investors are essentially paying a premium on the bond, said CNBC.

Given that negative rate sovereign bonds are literally less than worthless now, one would wonder who will buy them and why.

There are a couple of reasons why. One is that central banks buy bonds to drive economic growth, and they continue doing so even in the event of a negative yield. Similarly, certain large institutional investors will also keep buying them because they're bound by their charters to do so even if the yield slips into the negative territory. On a small scale, individual investors might choose to buy them on the belief that the currency they're denominated in will rise in value to the point where the increased worth cancels out the negative yield, at which point it can still generate profit. Along these same lines, they may also be bought on the belief that the currency might fall in value, in which case the bond, while a guaranteed money-loser, will still retain more value than actual cash.

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