The problem of negative returns on sovereign bonds may be spreading. U.S. Treasuries are seeing yields fall on all parts of the curve, with 10-year and 30-year yields reaching historical lows. The 10-year Treasury fell to 1.38% in early morning trading Tuesday, a historic low as fears about growing global uncertainty hit growth expectations both in America and globally. The 30-year Treasury fell to 2.15%, a 101 basis point decline from a year ago (10-year yields fell 100 basis points over the same period).
While short-term rates are still up from a year ago, all rates have fallen in the past month. The three-month yield is down to 0.25%, down three basis points in the past month, or a decline of over 10%.
The specter of negative interests is growing over American markets, with growing fears that the Federal Reserve is powerless to change the fall in interest rates. As Treasury rates theoretically reflect market expectations for future economic growth and inflation, the decline indicates that the market expects growth and price growth to remain weak despite the central bank’s moves to catalyze both.
Federal Reserve chairwoman Janet Yellen has rejected a negative interest rate policy. Although acknowledging their legality, Yellen last month said that a NIRP was unlikely to come to American soil as growth remained strong and inflationary tailwinds would bring both prices and wages up.
More recently, the Federal Reserve has been significantly more downbeat on global growth. The United Kingdom’s decision to leave the European Union, a shock to markets and political analysts alike, has caused expectations of interest rate hikes later in 2016 to reverse, with the Federal Reserve hinting that it is likelier to postpone rate hikes until the uncertainty around the Brexit is more fully resolved.
At the same time, the effectiveness of NIRP in countries where it has been implemented has remained heavily under question.
Japan was the first country to implement a negative interest rate as a matter of monetary policy, but the technique has spread to the Eurozone, Denmark, Sweden, and Switzerland. To stave off low growth and increasingly low money velocity, these countries have effectively instigated a tax on deposits to encourage savers to invest in riskier asset classes.
While some investors have looked to riskier assets, the net effect of NIRP remains unclear and controversial. At the core of NIRP’s criticisms in Europe, analysts and economists warn that banks’ inability to pass on NIRP costs to savers has resulted in shrinking margins and inevitable losses due to banks’ business model of borrowing at short-term rates and lending at longer-term rates.