Tuesday, June 7, 2016

The Rise Of Negative Interest Assets

An article buried deep in the Weekend Financial Times reports that the total of public bonds bearing negative yields has now passed US $ 10 trillion.  I have made an effort to check on the current global  size of such issues. I found a 2012 number that put it at 56 trillion, so maybe this number has now risen to 70 trillion of higher.  But I am sure it is still well below 100 trillion.  So, this total of negative yield public bonds is well over 10%, whatever precisely it is.  It is now a non-trivial portion of the total.

The article also reported that there is also a noticeable, if  much smaller, amount of privately issued such bonds, now at about US $ 380 billion.  This is certainly a miniscule portion of those bonds, but most people probably think that this total is zero or barely above. 

I am one of those who early on became aware that we might have nominal negative interest rates (as well as negative prices) with these first appearing momentarily publicly in the mid-1990s in Japan, even as the vast majority of economists declared such a phenomenon to be impossible.  As a a matter of fact I know that the federal funds rate went negative during intra-day trading on Dec. 31, 1986, the last day of the old tax code prior to the implementation of the Reagan tax simplification.  The rate also went as high as 18% during that day of wild trading, obviously an extreme case.  I have this from the person who handled Fannie Mae's trading account with the Fed and is not public informiation.  But it happened.

I have been someone not all that bothered by this phenomenon and have even welcomed moves by central banks to use them.  However, I confess that seeing a rising portion of public assets bearing such negative yields, I  become concerned about longer run if this continues.  Yes, boring annuities and insurance companies and such entities, and all that, but they have trouble doing what they are supposed to  do if there are not some positive interest rate assets around out there.  I imagine that the vast majority will  remain positive, so probably this is not a big deal.  If the world economy will just get growing more solidly, these negative yield bonds will  disappear, and I am not a fan of  some of parts of the insurance industry, such as the US health care part.  But if in fact positive yield bonds become scarce, there will be a lot  of things society will  have to do, such as taking over  insuring against fire, theft, and many other things.  This is probably silly paranoia, but then I was aware of the reality of negative interest rates long before most thought such were even remotely possible.

Barkley Rosser. 


Christian Zimmermann said...

This happened even earlier: FRED Blog

rosserjb@jmu.edu said...

Thanks, Christian. I stand corrected. Looks like around 1979, not when one would have expected it

Anybody got any earlier examples, maybe some from ancient history like the negative prices for brides in the Babylonian bride markets described by Herodotus? Usually when a price goes negative we say there is a new market, that of removing something, or in the case of brides across nations we see national differences with some having positive prices on brides and others positive prices on grooms. But in ancient Babylon the would-be brides were lined up with the most desirable going for positive prices, with this an auction and the price falling, with it then allowed to go negative for the least desirable, all in clearly one market).

ProGrowthLiberal said...

Christian notes Swiss interbank rates turned negative. There is a somewhat related issue known as negative swap spreads. Here is the US$ 10-year swap rate:


It is less than the 10-year US government bond rate - hence negative swap spreads. In Germany, the 10-year government bond rate has been negative but Euro based swap spreads have not turned negative - yet.

Ken Houghton said...

There were Indian bank's paying -3.00% interest on deposits in 2008/early 2009.

Myrtle Blackwood said...

"if in fact positive yield bonds become scarce, there will be a lot of things society will have to do, such as taking over insuring against fire, theft, and many other things...."

Could these negative returns on money be revealing a truth - that "anything that just costs money is cheap?" (John Steinbeck)

I can't see a private insurance company insuring against the consequences of breaching climate change tipping points. Many climatologists believe that that is where we're at right now.

rosserjb@jmu.edu said...


Actually the insurance industry has been worrying for some time about insuring against global warming. This is not a matter of insuring globally somehow, but a matter of insuring specific properties, notably oceean-front ones. For better or worse, insurance companies are very hard-nosed, and even if Republicans in the US like to deny global warming, the insurance companies must take the scientific realities and associated probabilities of ocean rise seriously. The upshot has been for some time rising flood insurance rates for beach properties even in the US. I do not know about other locations.

Cacky said...

Beach-front properties in Sydney, Australia uninsurable against sea-action