What Happens If U.S. Interest Rates Turn Negative?

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 14 August 2019

⏱️ 31 minutes

🔗️ Recording | iTunes | RSS

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Summary

What are negative interest rates, why they could come to the U.S. and what investors can do about it.

In this episode you will learn:

How negative interest rates are even possible.
How longer life spans, central bank actions, changing time preferences and the FIRE movement are contributing to negative interest rates.
What is the paradox of thrift.
How investors can earn a positive return on bonds even if interest rates are negative.
What are some indicators to watch for that could signal imminent negative interest rates in the U.S.
How individuals need to adjust their lifestyles in an era of negative interest rates.

Thanks to Peloton and The Great Courses Plus for sponsoring the episode.

For show notes and more information on this episode click here.

[0:20] Germany government bonds go negative for the first time.
[2:38] Understanding savings: the paradox of thrift.
[6:35] The concept of the individual choice and the perceived expense of saving.
[11:05] The savings glut could lead to negative interest rates in the U.S.
[14:40] Three reasons one would invest in negative-yielding bonds.
[18:38] Central banks are influencing the spread of negative-yielding bonds.
[20:29] What could happen to the U.S. economy if interest rates fell.
[22:11] Three factors David is looking at for an indication of falling interest rates.
[25:49] What we can do if U.S. interest rates go negative.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it, how to live without worrying about it.
0:10.0	I'm your host David Stein. today is episode 264.
0:13.2	It's titled, What Happens If U.S. interest rates go negative?
0:20.4	Last week, the yield on the 30-year government bond in Germany went negative for the first time ever.
0:29.0	Now there are 15 trillion dollars worth of bonds around the world about 25% of the world's
0:36.4	bond supply that are priced so they earn a negative yield. That effectively means that you're paying when you buy one of these
0:45.4	bonds you're paying somebody money to hold your money. There's a cost to actually
0:51.0	investing. Back in episode 225 it was how to invest in bonds and we talked
0:56.6	about the relationship between interest rates and bonds as as interest rates go up, the value or the price of bonds fall, and when interest rates
1:07.5	fall, the price of bonds go up.
1:11.3	In order for a bond to have a negative interest rate for bonds that are actually
1:15.6	outstanding already, let's say it's originally a German bond, a 10-year bond that was priced to yield 1% and is paying interest of 1%.
1:27.0	If rates fall enough, the price of that bond goes up so high that when you factor in the interest payments you're receiving
1:36.1	plus the principal that you receive, let's say at the end of the bond you get a hundred dollars
1:41.6	of principal back but you paid a hundred and twenty to buy the
1:44.7	bond then you're going to effectively have a loss. But it's not just that. The
1:50.0	German government is actually issuing new bonds that have a negative yield.
1:56.0	In March 2019 there was an article in the Financial Times that mentioned Germany had sold
2:01.4	2.4 billion euros of 10-year government bonds at an average yield of negative 0.05%.
2:10.0	They said that they received 2.6 times more bids for the debt that was accepted.
2:17.0	The Financial Times clarified the negative yield means that investors who bought at Wednesday's
2:22.1	auction and hold to maturity are guaranteed to sustain a loss.
	...

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