{"id":14256,"date":"2016-08-27T12:52:21","date_gmt":"2016-08-27T16:52:21","guid":{"rendered":"http:\/\/www.pgm-blog.com\/?p=14256"},"modified":"2016-08-27T12:52:21","modified_gmt":"2016-08-27T16:52:21","slug":"welcome-to-the-negative-interest-rate-world","status":"publish","type":"post","link":"https:\/\/www.pgmcapital.com\/nl\/welcome-to-the-negative-interest-rate-world\/","title":{"rendered":"Welcome to the Negative Interest Rate World"},"content":{"rendered":"

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Dear\u00a0PGM Capital<\/strong>\u00a0Blog readers,<\/p>\n

In this weekend blog article we want to elaborate on the fact that the value of negative-yielding bonds – both government and corporate – swelled to US$13.4 trillion<\/strong> this week as negative interest rates and central bank bond buying ripple through the debt market.<\/p>\n

INTRODUCTION:<\/strong><\/span>
\nIn market economies, money is the measure of the value of goods and services, and the interest rate is the price of money itself. When the price is zero, it makes no difference whether money is kept under a mattress or lent, because there is no cost to holding or borrowing cash.<\/p>\n

Policy makers in both Europe and Japan in order\u00a0to prevent their respective economy to slide back into\u00a0deflation, or a spiral of falling prices that could derail the economic recovery, chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S.A.<\/p>\n

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But how can the price of money \u2013 which, after all, makes the world go round\u00a0\u2013 be zero? And how can it possibly ever become negative?<\/p>\n

Negative rates means that the lender pays the borrower for the privilege of lending money.<\/p>\n

Yes, you read that right. You lend money to an entity and will not earn any interest. In fact, you will get back less money than you lent when the bond matures, which is where the \u2018negative\u2019 part comes into play.<\/p>\n

Only bad things, like toxic waste, have a negative price, the equivalent of a fee payable to anyone willing to make them disappear. Does this mean that negative interest rates embody a new perspective on money \u2013 that it has gone \u201cbad\u201d?<\/p>\n

PGM CAPITAL ANALYSIS AND COMMENTS:
\n<\/strong><\/span>The talk of negative rates has spread also to the USA, with Fed Chairwoman Janet Yellen, failing to take them off the table, at a recent congressional hearing.<\/p>\n

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Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish\u00a0banks that hoard cash instead of extending\u00a0loans.<\/p>\n

History never looks like history when you\u2019re living through it, but this is the first time in at least 5,000 years we have driven interest rates below zero.<\/p>\n

If you were dropped to earth for the first time ever, how would you objectively view the current 10-year government bond yield environment?<\/p>\n