Last week Germany’s 30 year bond yield dropped BELOW 0% for the first time! Several more central banks dropped their short-term rates last week too in response to the Fed’s rate cut as they try to keep their currency values. Third, several banks in Denmark have dropped their mortgage rates to 0% or below 0%. Fourth, around $15 trillion of outstanding bonds worldwide, or about 25% of the market, now trade at negative yields.
Tyler Durden of PIMCO, the largest bond fund manager in the world, wrote a story titled, “PIMCO Warns Negative US Treasury Yields ‘Swiftly Change from Theory to Reality.’”
First, Tyler asks what’s behind negative interest rates globally? First, the Bank of Japan owns about 50% of Japan’s sovereign debt and the European Central Bank owns nearly 30% of the bonds issued by their respective governments. Second, demographics and rising life expectancies are causing people to save more money for the future and not spending or consumer their money today. Third, technology is driving down the cost of capital and labor and these savings “tend to push the ‘natural’ rate of interest lower and lower.”
Second, Tyler asked what’s causing interest rates in the U.S. to drop? First, job growth in our labor market is starting to slow and he believes that households will continue to increase their savings in case of a job layoff. Second, more tariffs against China is raising uncertainty for large companies and thus they are postponing or reducing investment spending and hiring further. Third, with increased saving in America our “natural” rate of interest is dropping FAST. Thus, many investors believe the Fed’s “slow” rate cuts are in essence a “tightening” of monetary policy versus the world as we are not dropping our rates fast enough.
Thus, it appears we may have a Race to the Bottom by central banks around the world in order to prop up the value of their currency against the Dollar and try to keep their own economy growing. This means the Fed could be forced to drop short-term rates back down to 0% in the next year or two and I expect long-term rates like on mortgages will drop substantially too.