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When YieldReport was studying economics (admittedly some time ago), a country with debt equal to 2.3 times its national output (GDP) and a rapidly ageing population might have had trouble borrowing money.
Not so in the new world economic order.
Japan has such a debt profile and an ageing population but today it did what seems quite unthinkable a year ago. It sold 10 year government bonds at auction for a yield of -0.024%. This means investors are actually paying the Japanese government to hold their money for the next 10 years.
It is the first time a major economic power has sold 10 year government debt at a negative yield. YieldReport readers will recall that Switzerland sold 10 year bonds at a negative yield in April 2015 but Japan’s economy is nearly 7 times the Swiss economy at USD$4.6 trillion.
Germany is getting close as well with German 10 year bonds trading at around 0.10% or 10bps. German 10 year bond futures traded below zero this week for the first time which suggests an actual bond rate below zero can’t be far away.
So what does it all mean? Well, simply put, central banks employ a negative interest rate strategy when they fear deflation. Deflation is devastating for an economy and for jobs. Central bankers are desperately trying to stave off this outcome as history shows a generation can pass before an economy fully recovers. Interest rates were lowered as the first attempt at stimulating growth. Then quantitative easing was introduced, where governments in effect print money to induce inflation. The money printing experiment has not really worked and so now negative interest rates are being employed.
By charging banks to hold deposits at the central bank, it is hoped that banks will lend money aggressively. This in theory will lead to greater investment, employment and growth. The textbooks don’t really cover how this all works as it has never been tried before on such a massive scale.
The old economics degree doesn’t really explain all of this.
An explanation of negtaive interest rates
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