What Negative Interest Rates Are Signaling
We live in a very unusual time. With the European debt crisis on the market’s mind daily, and as China’s economy slows and the U.S. economy falters, the world has become more complicated.
Economic slowdowns and/or recessions are normal, but what is unusual this time around is the fact that interest rates in many countries are going negative.
Investors are paying certain governments to hold onto their money. Government debt is not an investment vehicle anymore; it has become a safety deposit box for investor money. Negative interest rates are signaling the fear investors have.
Just in the last month, Germany’s two-year government debt bond yielded a negative interest rate of -0.002%. Investors believe that should the eurozone fall apart, Germany’s economy will be one of the few to withstand the financial crisis storm. As such, investors paid for Germany’s government debt, because they believe they have assurances of getting their money back.
The Netherlands, another European Union member, is one of the few countries with a AAA credit rating left in the world. Its economy has certainly suffered from the turmoil in Europe, but with low unemployment and relatively low debt-to-GDP, investors believe it is a safe place to park their money. The short-term government debt of the Netherlands was sold at negative interest rates, as well, in the last month, as investors put interest rate returns aside for the safety of their money.
Two countries outside the European Union that have seen their currencies skyrocket and their interest rates fall in the last few months are Switzerland and Denmark.
These countries have attempted various methods to try to stem the tide of investor money pouring into their countries. Switzerland and Denmark are concerned that their rapidly rising currencies are hurting their exports, which is why they are doing what they can to stem the rising tide, as their interest rates fall.
For the first time in its history, the central bank of Denmark set its deposit interest rate to -0.2%. This negative interest rate was set to discourage investors from investing in the country and so driving the Danish currency higher. With investors now having to pay for the privilege of holding Denmark’s government debt, the central bank of Denmark hopes it will achieve its goal.
In a strange turn of events, for the first time in its history, France sold its short-term government debt at negative interest rates. With France’s banks so heavily exposed to the debts of southern Europe, especially Italy, this move is indeed strange. However, the government debt that was sold at negative interest rates had durations of up to only six months.
What all this means, in my opinion, is that investors are frightened not only about how the European financial crisis will resolve itself, but also about a possible global economic recession, which could cause stress in the financial system.
Investors are worried about banks going bust and the consequences and reverberations of that around the world, given the fact that the worldwide financial system is as interconnected as it has ever been thanks to the credit derivatives market.
We truly live in an unusual time. Negative interest rates are signaling the loss of confidence investors have in the financial system and Europe’s ability to solve its crisis. Investors would do well to heed these warnings.