Escaping to the beach during the month of August and what do you see? A sea of red. Not the sea where your children will take a swim, but the bond markets of the developed world.
After the financial crisis, central banks in most developed countries started to reduce rates. The idea was that low-interest rates would help consumers spend more as saving becomes less attractive and companies would start to borrow more and invest. The US and Germany, for example, have had a good run in the past few years but other economies have had to deal with some major structural problems and low-interest rates have helped the likes of Ireland, Spain, Portugal and even Greece to some extent
When the economy did not fulfill the expected turn-around, central banks cut rates even more dipping into negative territory. According to an index calculated by Bloomberg, a quarter of the bonds issued by governments and companies worldwide are now trading at negative yields. Creditors holding USD 15trn-worth of securities will make a loss if they hold them to maturity.
All signals coming from central banks right now point to a prolonged period of low and negative interest rates. The ECB has warned that it has run out of options bar buying more bonds from the market which has not been effective to rekindle inflation so far. It has called on governments to prime the pump as it and other central banks see a recession rearing its head. Fiscal policy may be the only option now as monetary policy has reached a dead-end.
Gradually, negative interests are making their way into the savings of many retail investors. The German government is now irrationally debating the prohibition of charging negative interest rates on deposits of retail investors, leaving the banks to assume the cost imposed by the central bank. Insurance and pension funds which by law need to invest a large portion of their holdings in fixed income instruments will suffer and with them their clients.
In the short-term, negative rates will continue to be positive for real estate investors through cheaper mortgages and equity markets – any dividend paid is better than a negative return on your fixed deposit and you have the expectation of rising prices. When you return from the sea take a close look at your holdings and do not forget to buy equities.
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