Sunday, April 24, 2016

A Very Little Bit On Negative Interest Rates

Busy with other things today, so this will be terse.

I've been reading up on what negative interest rates in Europe and Japan are doing to distort their economies and markets. Here's a tiny summary of one problem.

When a country goes into negative rates, it starts to eliminate ultra-safe investments that will provide a return. The farther you go negative, the more of these investments disappear. This is important for insurers and banks who rely on bonds to provide both a return and a source of capital for accounting and regulatory purposes.

Instead of bonds, then, the insurers and banks, who must find a return in order to maintain a margin between their investments and obligations, begin to invest in riskier and riskier assets. An economic downturn which would otherwise not touch their most secure holdings, bonds, can now cause them real problems.

There's much more, since negative interest rates turn part of the investment world upside down, but that's a start.

1 comment:

WC Varones said...

It's also murder on savers: