Negative Interest Rates Turn Saving, Borrowing Upside Down


“If you look at it historically, people with savings accounts never had any kind of interesting performance,” he said. “The inflation rate ruins any returns on the government bond market or the savings market – and it has always been that way historically. What shocks people now is that people must say the word zero, or even negative, interest.”

Michel, who is 53, teaches his coachees about value investing, a more time-consuming approach that analyzes financial statements to look for companies the market may be underestimating.

His approach with his own money: “I will buy stocks until the end of my days.”

Pushing people to invest in riskier assets is part of the stimulus effect central banks are trying to impart. But there are also fears that by doing so, very low rates can cause markets to bubble up, and crash back down with painful consequences. So far, the dire predictions haven’t come true. The current bull market in U.S. stocks turns 11 years old on March 9.

Four trillion euros worth of government bonds of the 19 countries that use the euro now yield less than zero. Trillions more in Japanese and other government bonds trade below zero around the world. Even Greece, which defaulted on government bonds in 2012 and carries the highest debt load in Europe, was able to sell three-month notes at a negative rate.

Why, in fact, would anyone pay for the privilege of buying a bond?

One way of viewing the phenomenon is that the investor is paying for the safety of the investment. Or buyers may hope to sell the bond at a profit. That is possible if rates go even lower – as some analysts think they will.

On the positive side of the ledger, low or negative interest rates can make it easier for companies and consumers to borrow, stimulating economic activity. The European Central Bank says its policies created 11 million new jobs since 2013. In the U.S., home sales have picked up as mortgage rates have fallen to 3.7%.

Now, even some home buyers can get into the negative rates game.

Denmark’s Jyske Bank offers a minus 0.5% interest mortgage while still making a profit. Customers must make monthly principal payments, but the sum they owe is whittled down month by month by the negative rate over the life of the mortgage. The bank is able to fund the mortgage by selling a bond at minus 0.5%, passing the rate to the customer, and making money on modest mortgage fees.


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