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Negative interest rates are a real thing. But do not expect your local bank to start paying you to borrow money.
President Trump has launched a nest of hornets this week when he tweeted that the Federal Reserve should reduce interest rates "to zero or less". It was reacting to the growing volume of foreign government bonds and other debt securities – now totaling $ 15 trillion – that carry negative returns. Most have been published by governments in Western Europe and Asia in hopes of reviving their stagnant economies.
Trump apparently thinks that the United States, thanks to the Fed's "boneheads", misses a chance to refinance their debt at an extremely low cost. Perhaps citing a stern reaction from the markets, some financial experts have called his proposal a "recipe for disaster".
When bond rates become negative, the impact on consumers can be shocking. Two Scandinavian banks recently offered 0.5% interest-free fixed interest rate mortgages, which means that if you do not have different fees, creditors will pay back less than they do. had originally borrowed.
But in the United States, mortgage and other debt rates remain well above zero and will likely remain so, analysts said.
"It's just not relevant here in the United States; it's a lot of noise for nothing, "said Greg McBride, Chief Financial Analyst at Bankrate.com. "We are very far from that" in the United States, he said.
Admittedly, interest rates are also generally declining in the United States, partly because of concern over the slowdown in the growth of the US economy and by the decision made in July by the Federal Reserve to reduce its short-term borrowing policy rate for the first time since the severe recession. a decade ago.
The Fed had kept its rate close to zero to help the country out of the recession, then raised the rate nine times from the end of 2015. The Fed's most recent quarter-point cut has lowered the rate in a range of 2.25% to 2.5%, and many are expecting a further cut next week, as the central bank tries to preserve the long-term expansion of the economy. American economy.
However, the economic outlook remains worrisome as inflation remains low for two reasons. Treasury bond prices have risen and their yields have fallen in recent months as investors seek alternatives to riskier investments such as equities. The yield on a 10-year Treasury bond, for example, fell to 1.90% on Friday, from nearly 3% a year ago.
In turn, mortgage rates for mortgages and new car loans have declined this year. The average rate of a 30-year fixed-rate mortgage stands at 3.56%, up from 4.51% at the beginning of the year, according to Freddie Mac. The rate of a five-year loan for a new car has dropped from 4.96% to 4.62%, according to Bankrate data.
"These rates are still far from zero," said David Ely, associate dean of the Fowler College of Business in the state of San Diego. Even though credit costs continue to fall, "I will not expect negative rates," he said.
The range of negative foreign rates and lower US rates is uncomfortable for Americans with credit card balances: the average interest rate on cards is 17.8% and it has not much has changed since last year, according to Bankrate. Credit card rates are so high in part because card issuers lend unsecured money – which means it does not require collateral – and credit card balances are often part of debts canceled when people file for bankruptcy, says McBride.
The low interest rate environment has also limited the profits of US savers in recent years. A one – year deposit certificate now reports an average of 0.85%, according to Bankrate figures. (Some online banks only pay more.) Still, this is up from 0.30% three years ago.
"It's a terrible time to be an investor," said Ely.
Countries such as Germany, Denmark and Japan are among the countries that have issued debt securities in recent years and are now performing negatively, generally because securities prices have been offered upward and downward. their low coupon rates were below zero. Bond prices are moving in the opposite direction of their yields. Thus, when the price of a bond increases, its yield decreases.
Last month, Germany sold 30-year bonds with a zero interest coupon. And since the demand for bonds was plentiful, bond prices rose and pushed their yields into negative territory.
Germany and other countries have incurred such debt in the hope of keeping their credit costs as low as they are in growing their struggling economies.
Trump has taken note of negative foreign rates to support his argument that the Federal Reserve should further lower US interest rates to stimulate the US economy and maintain America's competitiveness in trade. "Germany is actually" paid "to borrow money", he tweeted last month after the G-7 summit. But unlike Germany, the United States has a growing economy.
Anyway, why would anyone buy a government bond that would earn negative interest, let alone ask for a higher price?
"Because it's the ultimate hideaway, where you're willing to pay the government to stock your money," if you fear riskier investments such as stocks, said McBride. "You are willing to pay that to minimize your losses."
In addition, institutional investors such as pension funds and insurance companies often have policies that require them to keep part of their investment portfolios in government bonds, even if these investments have a negative return, they said. analysts.
Peter Heilbron, managing director of Trace Wealth Advisors at Sherman Oaks, explained that these investors also refused to transfer much of their bond assets to other havens, such as gold and silver. money market funds in the short term.
Even if they trade with a negative return, the bonds provide locked-in capital and a coupon interest rate for an extended period, while gold prices and money market yields fluctuate constantly, he said. declared.
This certainty is essential for pension funds and insurers, Heilbron said. "If I know I have to finance a future liability and I can lose some money along the way [with negative yields] to be able to finance it, I will buy the safest asset against speculation on a riskier asset such as gold that has no known outcome on a specific date, "he said.
Meanwhile, for US consumers, the downward trend in rates means "it's the right time to take out a mortgage or borrow for a car, especially if you have a good credit rating," Ely said.
But Americans should be hopeful that US rates will never drop so low that they become negative, as negative rates would mean that the US economy has faced serious problems, McBride said.
"The idea of negative interest rates sounds weird, and for borrowers, it's fun, but the economic context that would create such a scenario is not something we want" , did he declare.
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