08-29-2019, 07:36 PM
** 29-Aug-2019 World View: How low can interest rates go?
One of the big debates today is how low can interest rates go.
So if you purchase a $1000 government bond with a yield (interest
rate) of 2% per year, then after a year the bond will be worth $1020.
But if you purchase a $1000 government bond with a yield of -0.5% per
year, then after a year the bond will be worth %995. In other words,
you have to pay the government to keep your money safe.
Ten years ago, I heard analysts on tv say that interest rates could
never go below zero. That was before interest rates started going
below zero. Many countries today are offering bonds with negative
yields. There are $17 trillion in investors' hands today with
negative yields. Investors had to put their money somewhere, and
rather than put it in the risky stock market, they have a
country central bank keep the money safe, in return for a fee
(defined by the negative yield).
So for example on the German 10 year bund today, the yield
is 0.69%.
The yield on the 10-year US Treasury bond has been falling sharply
recently, though it's still positive at +1.5% today. A lot of
people believe that it will go negative before long.
Today on Bloomberg tv, an analyst Alberto Gallo of Algebris
Investments was asked the question about much more the German bund
yield could fall.
He said:
One of the big debates today is how low can interest rates go.
So if you purchase a $1000 government bond with a yield (interest
rate) of 2% per year, then after a year the bond will be worth $1020.
But if you purchase a $1000 government bond with a yield of -0.5% per
year, then after a year the bond will be worth %995. In other words,
you have to pay the government to keep your money safe.
Ten years ago, I heard analysts on tv say that interest rates could
never go below zero. That was before interest rates started going
below zero. Many countries today are offering bonds with negative
yields. There are $17 trillion in investors' hands today with
negative yields. Investors had to put their money somewhere, and
rather than put it in the risky stock market, they have a
country central bank keep the money safe, in return for a fee
(defined by the negative yield).
So for example on the German 10 year bund today, the yield
is 0.69%.
The yield on the 10-year US Treasury bond has been falling sharply
recently, though it's still positive at +1.5% today. A lot of
people believe that it will go negative before long.
Today on Bloomberg tv, an analyst Alberto Gallo of Algebris
Investments was asked the question about much more the German bund
yield could fall.
He said:
Quote: There is a boundary around minus 1% where it's bettter
to store cash or gold underground. You can put a billion euros in
a cubic meter of space, and essentially you'll get zero [interest]
rather than paying 70 bp [-0.7% yield]. So there is a physical
limit [to how low interest rates can go]. We're getting
close."
