Zero Interest

Finding a Plus in Minus Territory

  • Why it matters

    Why it matters

    The global era of zero interest rates, which shows no sign of ending, is redefining basic investing assumptions. Despite negative returns on standards investments like bonds, the financial industry is continuing to buy for lack of alternatives.

  • Facts

    Facts

    • The yield on €2 trillion in outstanding European sovereign debt is now in negative territory.
    • The ECB’s plan to buy €1.1 trillion in European debt will only prolong the phase of negative interest rates.
    • Professional money managers are continuing to buy bonds with negative returns because they have few alternatives.
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  • Audio

    Audio

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euro coin

The European Central Bank caused an outcry in June 2014 when it ventured into uncharted waters to stimulate lending in Europe: For the first time in history, interest rates on deposit accounts slipped into negative territory.

The head of the Bank for International Settlements, Jaime Caruana, warned that the consequences were “anything but clear.”

After all, the entire architecture of the financial market is based on the fact that savers are rewarded and borrowers pay a fee for the privilege of borrowing.

But this basic principle of capitalism no longer applies.

Eight months later, it is becoming apparent that the ECB’s ultra-lax monetary policy has created a negative-interest economy. Yields have entered the negative zone in one investment class after another.

The total yield on €2 trillion ($2.26 trillion) in outstanding European sovereign debt is now in negative territory.

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