Negative rates are supposed to stimulate the economy, incentivising investment by making it less attractive to hold cash and spurring demand by making credit cheaper. But evidence of the theory working in practice is far from conclusive. Certainly Europe’s bankers are squealing, as they feel margins squeezed by low rates on lending and a reluctance to pass on negative rates to depositors.
Why did Europe promote negative interest rates?
Our Federal Reserve system and Treasury may operate within boundaries that are not available to the ECB (European Central Bank) functions, as the euro area's fiscal and financial rules are not similar. I will not expand this difference here. One may readily discover facts of their choice.
Suffice to note that the U.S. moved to Quantitative Easing, while the Euro Zone remained with a policy of austerity after the market melt in 2008. Many here will recall the rough times in Europe for several years following the melt.
As to investment grade bonds today
. IMHO, one can not (yet) invest in bond funds that will allow for the steady eddy yield and pricing from the days of yesteryear; to take one's investment into the future without a care and the feeling of protection against the nasty's. Keeping in mind, that as long as there are buyers, don't be concerned with the yield; as your pricing/capital appreciation will out perform the yield expected. My own question(s) to these type of bonds, is how long will purchases remain in place; IF the yields continue to trend to the negative zone???
Purchasers being the big investment houses, hedge funds, pension funds, insurance companies, sovereign wealth funds and individuals, etc.
With some of this in mind, this house has not been inclined to purchase investment grade bond fund(s) for any sake of yield; as this is third place in thought. First and second place belong to a cushion against the current political strains globally and what this may also bring for global equity(s). Yes, a protective place generating some yield and more so; since the mini melt in December of 2018, decent price appreciation. Early 2018 found a U.S. equity blip in February and a few rough patches until the mini melt in December. Early equity market tremors? I won't begin to suggest this knowledge; but money continues to run to IG bonds.
IF U.S. yields continue downward for whatever reason(s), what are the impacts?
--- CD's.....the folks who do not and/or will not invest in the markets, and maintain monies in CD's
--- financial institutions.....will they be able to maintain a proper spread (deposits/loans) to obtain a profit?
--- consumer loans.....mortgage, auto, etc.; would consumers take on too much cheap debt?
--- corporate bond issuance..... more or too much debt, and for what purpose?
--- private pension funding
--- insurance company(s) products, including annuities
I remain with the thought, as from 2009; This Time Is Different, at least for my investing period.
Your thoughts please.
Thank you for allowing my self therapy.