It’s not an easy concept to understand. Across much of the globe, interest rates have fallen to the point they have actually turned negative.
Instead of being paid to deposit money at the bank, depositors are being charged to keep their funds on deposit.
That sounds crazy, doesn’t it?
It’s happening in many countries. Banks and other financial institutions actually have to pay interest (or a negative interest rate) to deposit their excess deposits at the central bank.
It’s like paying a babysitter to watch over your cash.
What does it mean when yields are negative?
About one-quarter of worldwide government and company bonds now feature negative interest rates, says the Financial Times.
“That means (bond) prices are so high that investors are certain to get back less than they paid, via interest and principal, if they hold the bond to maturity.”
Government bond markets have gone negative in Japan, Sweden, Switzerland, Denmark and across the Eurozone, says the Times.
Why is this happening?
Central banks and economic policymakers across the globe are pushing rates lower in a bid to revive global economic growth.
The theory is that low-interest rates and accommodative lending conditions encourage consumers to spend and businesses to borrow, hire and expand, thereby stimulating economic growth.
The Federal Reserve in the U.S. is following the same playbook. Our rates are not yet negative, but they are dropping as the Fed tries to revive the economy.
Who’s getting hurt?
If you’re a conservative investor who likes stable and more secure investments like money markets, Certificates of Deposit, and bonds, you’re getting squeezed by these super low rates. You’ll find it very hard to earn enough investment income to pay your daily living expenses.
It is challenging to invest successfully with rates at today’s low levels. You may need to explore other more diversified investment strategies to capture the returns you need, while waiting for rates to rebound.