If you’re like me, you’re likely exhausted by the constant barrage of “negative” news. I’m not talking about the political bashing that has become our norm (sadly) or even the market Bears who seem to live to inspire fear. I’m actually talking about the latest resurgence of a concern over Negative Interest Rates. And don’t quit on me just yet, but this concept is actually really fascinating – I promise.
As of this writing, more than HALF of European government debt has a negative yield. Does anyone else remember when Greece’s 10 year debt hit yields of 30%??? (2010-2012). Now its at 2%. Spain, which has one of the highest unemployment rates in the EU, has a 0% yield and Italy, which is literally on the verge of bankruptcy, is looking at -1%.(?!?!) Didn’t we all learn in economics 101 that there is a “Risk-Return” trade off? Aren’t low rates supposed to be a sign of good health and safety? Don’t we invest money based on the whole concept of delayed gratification, i.e. that we forgo immediate consumption in hopes that future consumption will be greater? What is going on here???
To briefly illustrate this point: If I, as an investor were to place money in bank account with a negative yield, I would actually be PAYING the bank to hold my funds. Doesn’t sound like a very good deal – I’d rather go spend my money on something I’d actually enjoy…
If I apply this construct to entire countries with negative government debt yields (Italy, Switzerland, LOTS MORE), why are these governments not borrowing as much money as possible and just handing it out on street corners or pumping it into infrastructure? That’s not what’s happening.
So, is this the new normal? Were all of our Econ professors actually WRONG? Was debt mis-priced for the last few HUNDRED years, and only now do we have it right? Or, to jump into Bear territory, are we staring at a bubble of sorts? If so, what kind?? Equities? Unlikely - People actually PAYING their government to hold their money wouldn’t indicate that money is flowing hand over fist into equities. Bonds? Can bond yields go any lower? The jury is out.
I actually find this whole concept fascinating (I know, I need more hobbies). But the real question is, what does it mean to YOU??
- If you are a saver, you are being penalized by super low rates. Thus, beyond your cash needs (which is different for everyone, and if you don’t know yours, let’s talk), your funds should be invested.
- If you have high interest ANYTHING debt – credit card debt, school debt, etc. – AND have enough cash for a rainy day, work towards paying off that debt.
- If you are considering buying a home or an investment property, now is the time. If, you have an existing mortgage rate above 4.75%, run don’t walk to the refi office.
Otherwise, now is not the time to think negatively. The media does enough of that for all of us.
Keep Looking Forward!