Negative Rates Galore… Wait, What Are Those?

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What's going on?

On Thursday, Sweden’s central bank pushed its interest rate deeper into negative territory. Also, in the US, the central bank’s head said “negative rates” are not being taken off the table. Government bond yields in Europe, Japan and elsewhere fell further into negative territory. So what are these “negative rates”?

What does this mean?

Confusingly, the term “negative rates”  is used to refer to two things:

Firstly, some central banks – like the Bank of Japan and the European Central Bank – charge normal banks, like Deutsche Bank, interest to deposit money. That’s like you putting money in your bank account and paying something like 0.1% for the privilege of doing so.

Secondly, some government bonds are trading with a negative yield. Confusingly, this is often called “negative rates.” For example, if you buy a 5-year German government bond and hold it until it expires you will make a negative return. It’s a similar story in Japan, Switzerland, and other places.

The two concepts are related, but they are not exactly the same thing: one is a rate set by the central bank, the other is a yield determined by how government bonds are trading in the market.

Why should I care?

The bigger picture: Negative interest rates are supposed to help spur the economy – but it’s not clear that’s happening. The theory is that banks would rather lend money to people and businesses than lose money by depositing it with the central bank. Also, negative interest rates are supposed to be bad for one’s currency, and that should make it easier for companies to sell goods abroad. But it turns out that negative interest rates might be causing some systemic problems, like harming banks so much that they decrease the amount of money they lend out (see story below).

For markets: Stocks don’t like it when central banks struggle to stimulate the economy. Right now, it looks like economic growth is slowing in every major economy in the world – and central banks appear unable to come to the rescue, even with extraordinary measures like negative interest rates. That’s probably one reason stocks are doing so badly.

Originally posted as part of the Finimize daily email.

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