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NEGATIVE RATES AND NEGATIVE-YIELDING DEBT Negative rates refer to the deposit rate set by central banks for overnight deposits held at the central bank. Negative-yielding debt refers to notes and bonds that that have a sub-zero yield to maturity. Please note that negative overnight deposit rates do not necessarily cause markets to price debt with negative yields. Negative yielding debt is encouraged by the combination of a negative overnight central bank policy rate and aggressive central bank purchases of sovereign debt (that is, quantitative easing or QE). The ECB and BoJ have combined negative rate policies with massive asset purchases and the result is some $13-$15 trillion of negative yielding debt in Europe and Japan.


Both the ECB and the BoJ adopted negative rate policies to stimulate banks to lend more for business investment and consumer spending. They billed negative rates as an accommodative policy, which was certainly their intention. Unfortunately, it has not worked out that way. Negative rates are a tax, pure and simple. Banks holding deposits at the central bank are penalized, that is, taxed. In many cases, the banks cannot pass this tax on to their depositors, although that may not matter. What does matter is that within the economic system, the tax gets paid, and it has worked to discourage banking activity because financial sector profits have been stressed by the tax. In turn, the financial sector has been less able to expand lending, which might have encouraged business or consumer spending. Of course, this is not an interpretation accepted by the ECB or the BoJ.


Figure 1: Fed, ECB, and BoJ Overnight Rates


Source: Chart Created by CME Group Economics Bloomberg Professional (FEDL01, EUMIOD, BOJDPBAL)


Figure 2: Negative-Yielding Debt


Source: Chart Created by CME Group Economics Bloomberg Professional Bloomberg Professional (BNYDMVU).


23 | ADMISI - The Ghost In The Machine | November/December 2019


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