The Expansion Of Assets With Negative Nominal Interest Rates

Buried in the Weekend section of the Financial Times is a report that the aggregate value of assets that earn negative nominal yields has substantially expanded since the beginning of 2019 and has reached a new high.  So on January 1, 2019, the value of these assets was at $8.3 trillion.  As of six months later it had reached $13 trillion, a more than 50 percent increase.  There are fewer assets around that have negative yields than a few years ago, but the amount of money in them has grown, and the depth of some of the negative interest rates has deepened.  It used to be said that -0.5 percent was a lower bound, but some Swiss franc bonds are down to -0.8 percent.  The main ten year German government bond’s yield has fallen to -0.4 percent.

This reflects a general decline of interest rates around the world.  This would seem to be tied to a general slowdown in the growth of the world economy.  One of the most sharply shifting economies is that of Germany, in recent years the fastest growing in the EU, but apparently in negative GDP growth territory for the second quarter of 2019.  This is not a good sign for the entire European economy.  Of course, China has also been slowing down.

This general slowdown has spilled over into US long term interest rates, which the Fed really does not control.  Indeed, for only the seventh time since 1980, the ten-year Treasury bond’s yield dipped below the federal funds rare, a more dramatic inversion of the yield curve than we have seen so far, with the US economy going into recession soon after this inversion five out of the six previous times this happened. So this is not a definite sign of recession, but it is quite understandable that the Fed is now talking lowering short term rates, and not just because Trump is shouting at them to do so.

Barkley Rosser