The Slow Path to Negative Interest Rates


When it comes to this year’s financial markets, a few words may come to mind: volatile, frustrating, confusing, uncharted territory. All are very fitting when used to describe a market that began the first three weeks with a record-setting “worst start to the year ever” as reported by This start of 2016 was met by a relentless move back to the year’s highs as Janet Yellen, Federal Reserve Chairwoman, signaled that she wouldn’t be raising rates as often as she had originally intended. The recent “Brexit” referendum that parted Great Britain from the European Union caused a two-day, 800+ point sell-off in the Dow Jones Industrial Average** only to be met by another relentless move back to the highs of the year. The move higher was attributed to many things; but in my opinion, the move by our British friends has made it almost impossible for Janet Yellen to raise rates any time within the next year or so.

While these theatrics of the year have been going on, the Japanese Government has tried something that has never been done in the recorded history of finance: they have officially taken their Government Bonds into negative rate territory – as a policy. They have completely broken the paradigm and moved finance into the official “Twilight Zone.” This means that investors (who surprisingly still purchase these bonds) are guaranteeing they will actually pay the Japanese government to hold their money for them. It is a guaranteed loss if held to maturity. It seems like every pundit on television was just saying, “Interest rates are at zero – can’t go any lower than that!” Well, this Japanese move has broken through that floor, and what the world of finance has begun to realize is that there is an infinite number of digits on the other side of zero. Janet Yellen sent a letter to Congress letting them know that she was looking into the legality of negative interest rates here in the USA.

I’m not saying it is a certainty; but I would say there is a possibility over the next few years, in order to hold off the next recession, that we may see U.S. interest rates actually go negative. The interest charge to banks would most likely be passed down to deposit-holders, and we may begin paying banks an annual percentage to hold our accounts. With interest rates plummeting and the risk-free Japanese rate going negative, the annualized rate of return that investors should expect is getting lower and lower. This is going to be a slow path, and quite frankly, may not happen at all. Japan has been in a deflationary spiral since the 80s, and they started their stimulus programs long before we were even thinking about Quantitative Easing. Who knows? Maybe Japan is just ahead of the curve in this financial circus and negative interest rates will be here before we know it … a 1% C.D. may be viewed with envy at some point in the near future.
As you watch the world of finance, perhaps now is the time to find a Financial Advisor to partner with for your financial planning needs.


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