Interest Rate Prognosis: More Negative

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Grant’s (dated 12 October)

  • Prognosis: more negative.  The phenomenon of nominal interest rates below zero was virtually unprecedented in the 4,000 years of financial history prior to the current cycle, according to financial historians Sidney Homer and Richard Sylla, but that was then.  As of today, $16.16 trillion in global debt is priced to yield less than nothing, up from less than $8 trillion in March and not far off from the $17.04 trillion peak in August of 2019.  In terms of sovereign debt, Austria, Germany and Switzerland are paid to borrow at maturities as long as 15, 30 and 50 years, respectively.
  • Those figures grow far larger when accounting for the measured rate of inflation.   Strategists at J.P. Morgan wrote last week that the total stock of developed nation sovereign debt sporting a negative real yield now stands at $31 trillion.  That’s double the reading of two years ago, and equivalent to 76% of total developed nation sovereign debt, up from 57% in 2017.
  • Recent commentary from a trio of European nations indicates that the sub-zero debt stack may set new records sooner rather than later.  Let’s review:  First up, Norway, where the benchmark policy rate currently stands (or crouches) at 25 basis points.  Norges Bank governor Øystein Olsen kept the door open for a negative interest rate policy (NIRP) in a speech last Tuesday: “The possibility of further reducing the policy rate has not been ruled out.”  A move to (or below) zero “may. . . be appropriate in periods of severe financial market turbulence and sharply rising risk premiums.”
  • Then there’s the Bank of England, which has also set a 0.1% policy rate.  Unsatisfied with the results of the lowest rate in its 326 year history, the venerable institution appears to be clearing the groundwork for its own foray into the negative rate ether, asking commercial banks today (in tandem with the Prudential Regulation Authority) to assess their ability to operate under a NIRP regime.
  • As the ECB’s NIRP experiment drags along into a seventh year, results are wanting, with eurozone headline CPI inflation advancing at an average 0.9% annual clip over the past six years, compared to 1.6% in the September 2008 to Sept. 2014 epoch.  The evident solution: More of the same.  In an interview with The Wall Street Journal, ECB president Christine Lagarde indicated that more monetary support would be forthcoming in the event of more pandemic- and lockdown-induced economic pain

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