Can or will negative interest rates happen in the United States?

Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes

I am trying to wrap my head around negative interest rates. Who buys bonds with negative interest rates? Are they 100% monetized?

Could this be a trend that is coming to the USA?

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Bob Houston

Member since 2020 · 4 posts · 9 votes

Please know, no bank is every going to "pay you" to take out a loan - no matter how negative interest rates could go. Negative interest rates are an articulation of an economy slowing collapsing. Institutions (lenders) can live with negative interest rates for a certain amount of time - but must eventually come out. An institutional investor will park itself in sovereign negative interest rate debt with the idea that there may be a capital gain if interest rates sink even lower. Bottom line - a negative interest rate environment mean economic demand destruction / deflation / high unemployment / negative GDP. Everybody talks "V" shape recovery - but the yield on the U.S. 10 year note at .60bp tells the true picture... The economy is in dire straits.

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Bob Houston
Member since 2020 · 4 posts · 9 votes
6y
Please know, no bank is every going to "pay you" to take out a loan - no matter how negative interest rates could go. Negative interest rates are an articulation of an economy slowing collapsing. Institutions (lenders) can live with negative interest rates for a certain amount of time - but must eventually come out. An institutional investor will park itself in sovereign negative interest rate debt with the idea that there may be a capital gain if interest rates sink even lower. Bottom line - a negative interest rate environment mean economic demand destruction / deflation / high unemployment / negative GDP. Everybody talks "V" shape recovery - but the yield on the U.S. 10 year note at .60bp tells the true picture... The economy is in dire straits.
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
Completely understand retail lending would not go negative, I didn't think I implied that with the original post.

I just don't understand why any institutional investors accept negative interest rates at all? In the current environment, they could buy US treasuries instead of invest in nations with negative rates. Is the speculative play of rates dropping lower offset the holding costs. I guess it could.

Are banks being required to purchase negative-yielding bonds?

I wonder how much is monetized and purchased with newly printed/created money.

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Bob Houston
Member since 2020 · 4 posts · 9 votes
6y
You're correct - some of it is monetized - in bank reserves. An institutional investor will park in negative yielding debt for liquidity purposes - with the idea, under the current environment - it's the safest place to park large amount of funds short term. As retail consumers, we've been parking our money in negative yielding checking accounts at banks ( no interest and monthly fees) for a while now. Seems to be better than under the mattress.
There is some foreign capital coming into U.S. treasury's - that's why we're continuing to see the yields get pushed down. Foreign investors have an extra cost of carry with FX hedging - which pushes their yield down even further - and in some cases negative on U.S. debt. Regardless, one of their biggest concerns is liquidity.
I managed a derivatives based hedge fund for 20 years (retired now). When people asked me what I did I told them I traded liquidity and managed risk. Liquidity is paramount with large sums of capital.
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
@Bob Houston, Thanks!...very insightful.
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6y
Yields on bonds is really only a fraction of how money is made on bonds. The bonds value moves up and down, and money is made on that value. If a -1% value bond rises in value, and the yield goes to -2%, the bond has doubled in price.
as for the lending practice, its all about the delta in what you borrow and lend out at. If a bank can borrow from a central bank at -2%, then lend out at -1%, they still make that 1% delta.
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
With even a smaller pool of potential buyers at -2% there would be more pressure pushing yields higher. At some point, even a bold speculator would decide the risk of rates dropping more would diminish. And holding costs would add up. I sure dose not seem sustainable
I wonder what percentage of bond buying is long term hold and what percentage is speculative buyers.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y
@Bob Houston I know a bunch of guys in your line of work and have picked up some of the Vocab though very little of understanding, so can you weigh in on this:
Is it valid to say that a good deal of downward pressure on the T-note is due to the RELATIVE safety of the US and the current need for liquidity in the face of the potential need to cover riskier investments globally?
So people are willing to essentially break even (or who knows) p in the Tnote knowing they can cover debt calls with them instead of losing millions/billions to suddenly illiquid investments?
Not a speech masquerading as a question, a real question. And if the question is directionally right, what am I missing?
Thanks for sharing your thoughts!
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Nick Barlow
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
6y
@Gene Hacker Robert Kiyosaki has a podcast on this. Paraphrasing here, the general conclusion from the guest, who seems to be a well informed source, is that a negative interest rate is viewed as the best option compared to the potential alternatives-ie, taking a guaranteed loss vs unknown loss in a different investment. Also, these are all socialist countries with negative rates-simply buying outside of your own country is more regulated than for us here (at least for now...).
I’m not an expert by any stretch of the imagination, but I agree with the “Dollar Milk Shake” theory-that is, the US is the cleanest dirty shirt, and the (reported) $13 TRILLION in foreign, dollar denominated debt will create an inflow of money to the US...in my mind, that keeps us in the 0%-0.5% range like we see 10 yr treasuries at right now.
That’s just an opinion, and is probably worth what you paid for it lol.
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
Hi @Nick Barlow, I recall the "Dollar Milk Shake" episode. I will need to listen to it again.
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Christopher Yip
Holmdel, NJ · Member since 2018 · 1 post · 0 votes
6y
@Gene Hacker The Dollar Milkshake theory is from Brent Johnson, a macro trader. Link to Robert Kiyosaki's interview with Brent for those interested: https://www.youtube.com/watch?v=o_nRJkph4fs
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Nicholas Preston
Rental Property Investor · Danville, VA · Member since 2017 · 30 posts · 18 votes
6y
Negative rates will happen in conjunction with continued quantitative easing until there is a reset in how our currency system works. Since we left the gold standard it’s no longer money, just currency and that currency has to expand and debt continue to grow to keep the game going. You will have to pay the bank to hold your money and they will pay you to take out loans. That’s how negative rates work, central banks are inventing and creating tools to prolong financial markets as long as they can.
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Suzy Sevier
Rental Property Investor · Cambridge, UK · Member since 2020 · 123 posts · 64 votes
6y
@Christopher Yip Thanks for adding the link!
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Tony T.
Real Estate Investor · Harrisburg, PA · Member since 2010 · 73 posts · 217 votes
6y
There is pressure to move towards a cashless society. Once that happens, negative interested rates are a bank's friend as ANY savings or money you own will be charged negative interest.
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Ayyub Omer
Member since 2020 · 18 posts · 8 votes
6y
Everyone says that retail lending will never go negative, but there are instances of negative interest rate mortgages in some European countries (or more accurately, one instance that I know of). https://www.theguardian.com/mo... Maybe it'll happen in the states too at some point. Who knows what the future holds?
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
@Tony T., Just like inflation, it would be good for debtors but bad for savors.

@Ayyub Omer, mortgages with a negative rate. Wow. Thanks for sharing the link.
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Adam L.
Member since 2018 · 25 posts · 3 votes
6y
@Bob Houston currently in Denmark you can get a negative interest rate mortgage. Wild, so never say never. I think with the rate that the government is printing money these past few months helps the case that rates will stay positive. If you pull up a 100 year chart of interest rates you will see we go through 30 year cycles of inflation and deflation. If you also look at the recent surges in real assets like gold and silver this paints a real-time picture of inflation fears. I say real-time because gold and silver trade in the open market and are not subject to central banks' artificial control. To summarize, due to covid, and if we get a second wave, rates may go negative for a short period as the FOMC tries to stimulate 'quick' growth. I think inflation is what we really need to worry about in the next 5-10 years.
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Bob Houston
Member since 2020 · 4 posts · 9 votes
6y
If the Fed pushed overnight rates to zero and nominal 10 year rates went negative it would mean the deflationary environment is accelerating - which mathematically would mean "real" rates are rising and the risk premium on loans would spike. Coupled with that would be a severe reduction in loan issuance which would push M2 negative and velocity would collapse, resulting in an acceleration in negative GDP (negative feedback loop). That's the banking side. On the "assets" side - with the positive carry on the 10 year note now gone - leveraged risk parity funds would have to unwind, which would cause a sustained and massive collapse in stock markets. In short - negative rates in the U.S. would be an end game scenario. Real rates are currently negative - that is a deflationary environment..
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Gene HackerPro Member
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Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
6y
@Bob Houston, Do you think the current negative interest rates in Europe are similarly an "end game scenario"? What do you think will happen there next?
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Bob Houston
Member since 2020 · 4 posts · 9 votes
6y
Hi Gene - Yes - negative rates are a sign of deflation. There's a couple of painful ways out of it - and I think that's the problem - everybody wants a fix without the pain - and it's impossible. Solution #1 - Austerity - it would eventually turn the ship around - but that's 5 or more years of under-consumption, increased savings and paying down debt.. living below our means - which means a sustained weak economy (high unemployment, demand destruction and a slow leak in asset prices). It would eventually set the stage for another healthy expansion. Solution #2 - Defaults on the massive pile of debt. This would be a quicker fix - but more painful. I think we're going to get a combination of the 2. Regardless - I don't see a way out of the current situation without some pain. The solution coming out of the GFC in 2009 (massive debt injections), won't work now.. that's exhausted - and the bond markets are telling us this.

Here is a link to a recent great podcast by the brilliant Dr. Lacy Hunt discussing the above.
https://podcasts.apple.com/us/...

Thanks Gene

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