Let’s assume for a second that the majority of us out there don’t really understand negative interest rates – which isn’t all that hard given most people don’t understand interest rates or negative numbers, much less the combination. We see the headlines, we read a paragraph or two, but the very concept is so backwards, it would be like getting a tax break for buying lottery tickets, or getting paid by local government to park on certain streets, or one of those Google interview questions.

What are Negative Interest Rates?

Just what are negative interest rates? Well, a normal interest rate is the earnings or yield, an investor or saver gets for loaning, investing, or depositing their money with a bank or company or so forth.  The borrower promises to pay the money back, with interest.  Negative interest rates are quite simply the opposite.  Where instead of getting your money back plus some amount, the borrower promises to pay you back the money you lent them, minus some interest rate. It’s like paying for a safety deposit box, or a storage unit, or a wine cellar.  You put your stuff (money) in there, they protect it and give it back to you after charging a storage fee.

But this is money, not your old couch. Who in their right mind would want to pay a storage fee for money?

That’s the point. A negative interest rate can be used as a monetary tool to incentivize banks to lend more freely (or else they’ll pay the central bank to hold their very large deposits), and potentially incentivize individuals and companies to do more than keep their money sitting at the bank – perhaps making them spend it, or invest it, to forego a charge on it.

Will the U.S. Go Negative?

Back in February, Federal Reserve Chairwoman, Janet Yellen publically said that negative interest rates were possible.

“We’re taking a look at them … I wouldn’t take those off the table,”

That’s a swift change in potential policy coming from the Federal Reserve. Just months earlier, they raised interest rates for the first time in nine years, with hints of raising rates again in 2016, but that now seems like a pipedream.

The Global Scope of Negative Interest Rates

Negative Interest rates may be a foreign concept to the United States, but it’s certainly not foreign to countries outside of the US. Per the Economist:

On January 29th the Bank of Japan (BoJ) said it would cut its benchmark interest rate below zero, to -0.1%, in an attempt to counteract the effects of falling oil prices and China’s slowdown. The BoJ is following the lead of several central banks in Europe, including the European Central Bank (ECB), which first resorted to negative rates in 2014…[at -0.30%].

Back in February, Bloomberg estimated that $7 Trillion worth of global bonds had Negative Yields. That comes out to be around 30% of the global bond market. Bloomberg has a scale representation of what interest rate category foreign bonds fall into.

Bloomberg 7 Trillion in Negative Rates

Fast forward to April, and BlackRock now estimates that 38% of the global bond market have negative interest rates. That’s not even counting the countries and government agencies that are above 0% interest rates but remain at historic lows. BlackRock gives a great comparison of where interest rates were back in 2000 compared to today.

We now live in a persistently low rate environment, where decent yields are scarce. In 2005 virtually every asset in the Barclays Global Aggregate Index and Global High Yield Index was yielding at least 3 percent (with the exception of Japanese Government Bonds), and there were a variety of duration options. A decade later, only relatively small pools of assets (such as high yield and emerging market sectors) are offering 3 percent yield or greater, according to our analysis , and the higher yields require extending duration. See the charts below, where the size of the bubbles represents the size of each respective market.

2000 2016 Comparison of Interest Rates

Taking the U.S. out of the equation, the trend seems to be moving towards more negative interest rates, not vice versa. Late last week, the Bank of England pulled a Janet Yellen, suggesting that negative interest rates are possible.

Theoretically, I think interest rates could go a little bit negative.”

While the ECB said they’re leaving the door open for further interest rate cuts in the future.

Why Go Negative in the First Place?

It’s important to remember that just a couple years ago, negative interest rates were considered highly experimental, and now it’s a global trend. How did we get from then to now? That is a simpler answer. Central banks lower interest rates to encourage people and businesses to spend their money, and when you’ve lowered all the way to zero already, there’s only one place to go if they want to further incentivize  people to spend their money; although we’re reminded of that old line about doing the same thing over and over again expecting different results is insanity.

What does it mean for the Average Investor?

In the days following Yellen’s suggestion of the possibility of negative rates, we received texts and Facebook messages from some friends and families asking us if they needed to look into closing their saving accounts, in fear of being charged to hold money at {insert bank}. While we cannot absolutely rule that out, it seems things would have to get really, really, really dim for the U.S. economy for that to happen.  Although it’s worth noting that the average person is likely already being charged a net negative to hold their money at the bank through various charges, ATM fees, and so forth all while receiving little to no interest on their balances.  This is more of a discussion for central banks, however, not individual investors/savers (yet), per CNN :

“It’s the banks that are paying the penalty. The central bank is the “banker’s bank.” Banks deposit some of their funds there, much in the same way people put their savings in the bank.

When the central bank turns interest rates negative, it charges banks a fee to hold SOME of their money at the central bank. A JPMorgan analysis found that only about 2.5% of total bank assets are subjected to the penalty fee. It’s small, but meaningful. The intent is to spur banks to go lend more.”

What does it mean for the overall market?

So what could the unintended consequences be of more and more central banks implementing a once controversial policy – that was expected to be short term with manageable consequences – but  is looking more and more like a prolonged experiment?  Most people think it’s going to skew people’s investment decisions in a ‘reach for yield’ which could artificially inflate all sorts of different assets into bubble territory. Here’s Larry Fink of BlackRock:

“Their actions are severely punishing the world’s savers and

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