Negative Rates, Payment Systems, and Protests


  • The Negativity Surrounding Interest Rates

  • Keeping Pace With Payments

  • Protests Flare up Around the Globe

Multiple medical studies have shown the power of positive thinking: People with more optimistic outlooks experience longer lifespans, lower rates of depression and stronger immune systems; those with negative perspectives can face more frequent illnesses and a lower capacity to handle stress. We fear fixed income markets may be similarly impaired, as negative yields are here to stay in a number of countries.

Negative bond yields were long thought to be possible only in theory. Conventional wisdom held that, in a market of rational actors, no buyers would exist for an investment that promises to lose money. Recent experience calls for a revision to the textbook.

The movement toward negative yields started with short-term rates in Europe. Sweden’s Riksbank set a deposit rate of -0.25% as early as 2009 but was able to lift rates the next year. Then, as Europe struggled to recover from its double-dip recession, the European Central Bank (ECB) lowered its deposit rate to -0.10% in June 2014. The decision was criticized at the time for being an “expropriation of savers.” Former ECB President Mario Draghi defended the rate as a way to restore growth and allow interest rates to return to a higher level. More than five years later, the eurozone has avoided another recession, but the deposit rate has drifted further into negative territory.

Weekly Economic Commentary - 11/22/19 - Chart 1

Central banks justify negative deposit rates as a mechanism to encourage investment. With an effective tax on their accounts, depositors have a disincentive to save, and investments appear more attractive in comparison. However, commercial banks bear the burden; they are stuck losing money on their reserves but are hesitant pass the loss on to their depositors. Lower earnings may impair the ability of banks in some countries to extend credit.

At the other end of the yield curve, market dynamics are pushing longer debt yields into negative territory. Most government securities are issued with a positive yield and a fixed coupon payment. During risk-off intervals, investors seek the safety of bonds, bidding their prices up in the secondary market. As prices rise, the yield to maturity of the bond falls. Though the bond still pays its promised coupon, the buyer has paid a premium that exceeds the bond’s coupon payments, pushing the effective yield negative.

“The move toward low and negative yields continues, despite a good economy.”