Negative interest rates are 'guaranteeing a fixed loss' for a quarter of the world's government bonds

Global economic growth is pretty tepid right now and in many advanced economies inflation is nowhere to be seen.

So what do some central banks do? Cutting interest rates is a typical tool for stoking inflation and growth. But once banks hit zero interest rates, and they still can’t fuel inflation, where else can they go? — Some go into negative territory.

Negative interest rates are intended to encourage borrowing, discourage upward pressure on currencies, and help trade.

However, while the Swedish government’s massive experiment with negative interest rates seems to actually be doing what it’s supposed to — according to the Riksbank monthly inflation report — which dropped on February 18, negative rates are having a much broader impact around the world.

JP Morgan Asset Management Global Market Strategist Alex Dryden highlighted to Business Insider that “a quarter of the world’s government bonds are now guaranteeing a fixed loss for investors holding to maturity” because of central banks around the world starting to either implement or debate installing negative interest rates.

Here’s the killer chart:

A handful of countries have already said goodbye to ZIRP (zero interest rate policies) and hello to NIRP (negative interest rate policies). The goal of negative rates is to deter institutions from storing cash in banks and to flush that cash out into alternative investments, spurring the economy, growth, and inflation.

Japan is just the latest.

“The low yield environment we’ve been in since the financial crisis has evolved into a no yield environment as central banks begin to explore the world of negative rates,” said Dryden to Business Insider.

“Since the surprise announcement by the Bank of Japan (BoJ) that they would cut rates into negative territory, the percentage of bonds globally yielding in negative territory has surged to 27.2%. In other words, a quarter of the world’s government bonds are now guaranteeing a fixed loss for investors holding to maturity.”

instituted negative rates in the 1970s in an attempt to deter a flood of foreign investment, while in 2009 Sweden’s Riksbank became the first central bank to implement a negative interest rate in the aftermath of the financial crisis.

The Riksbank dropped its monthly inflation report on February 18, and for the first time in more than a year, inflation has ticked upward substantially.

The January reading came in at 0.8%, well above the forecasts of economists, who had predicted a 0.5% inflation rate.

More significantly though, that figure is higher than at any point since 2012, and the first rise since the introduction of negative interest rates, signalling that the experiment may finally be working.

The Swiss National Bank, Denmark’s Nationalbank, and the European Central Bank have since joined the Swedes, setting some of their policy rates in negative territory.

At the moment, no central bank interest rates are very deeply negative. For example, the ECB deposit rate is at -0.30%. But this is killing off government bond returns for investors.

“Unsurprisingly the worst affected region is the Eurozone where 35% of Eurozone government bonds yield below 0% whilst 75% of the index is yielding below 1%. The German bond yield is now negative out to a maturity of 8 years,” said Dryden.

But it’s not all bad news. In fact, it looks like the lack of return from government bonds will produce support for stocks.

“For investors seeking yield, this heightens the relative attractiveness of credit, including high yield debt. It also makes dividend paying equities look more interesting,” said Dryden.

“The UK is a good example. Even with average dividends arguably under pressure in the FTSE, the UK still offers a high average dividend yield (4%) compared to the rest of the world. Even excluding energy stocks, the UK currently offers a 50% higher dividend yield compared to MSCI World.”

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