Everyone is reading this new Joachim Fels piece at PIMCO today about the fact that there are now $15 trillion worth of negative-yielding sovereign bonds around the world, something that just a few years ago would have seemed wholly inconceivable based on what we thought we understood about human nature, risk, the mechanics of the financial system and behavioral economics.
In countries from Asia to Europe, investors are choosing to park their capital in investment instruments that actually cost them money rather than invest in riskier assets or use cash for consumption today…
What’s behind negative interest rates? Many observers blame central banks like the European Central Bank (ECB) and the Bank of Japan (BOJ) that are taxing banks’ excess reserves with negative deposit rates and have made bonds scarcer by removing them from the market through their purchase programs. The BOJ now owns about half and the ECB about 30% of the bonds issued by their respective governments, according to Bloomberg.
Secular drivers of negative rates
However, we believe central banks are not the villains but rather the victims of deeper fundamental drivers behind low and negative interest rates. The two most important secular drivers are demographics and technology. Rising life expectancy increases desired saving while new technologies are capital-saving and are becoming cheaper – and thus reduce ex ante demand for investment. The resulting savings glut tends to push the “natural” rate of interest lower and lower.
So far, this phenomenon has not occurred in the United States. But that may just be a matter of time.