"Interest Rates: Naturally Negative?"—PIMCO
From PIMCO MD and honcho
Joachim Fels at the PIMCO blog:
It is no longer absurd to think that the nominal yield on U.S.
Treasury securities could go negative. Last week the German 30-year
government bond yield dipped into negative territory for the first time
ever. Around $14 trillion of outstanding bonds worldwide, or 25% of the
market, now trade at negative yields, according to Bloomberg. What was
once viewed as a short-term aberration – that creditors are paying
debtors for taking their money – has already become commonplace in
developed markets outside of the U.S.
Whenever the world economy next
goes into hibernation, U.S. Treasuries – which many investors view as
the ultimate “safe haven” apart from gold – may be no exception to the
negative yield phenomenon. And if trade tensions keep escalating, bond
markets may move in that direction faster than many investors think.
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.
Against this backdrop, the
financial history of the last decade is littered with central banks that
either kept the “money” rate of interest above the “natural” rate or
tried to raise it too early (the ECB in 2011) or too far (the Fed in
2018). Both were punished by market forces and have had to reverse
course.
One likely factor behind the savings glut and negative interest rates
is negative “time preference.” Once upon a time, economic theory
maintained that people always value today’s consumption more than
tomorrow’s consumption – and thus display positive time preference.
People would therefore always demand compensation in the form of a
positive interest rate in order to forgo current consumption and save
for the future instead. People were viewed as impatient, and the more
impatient people are, the higher the interest rate has to be to make
them save.
This made sense in a world where people usually died before they
retired and struggled to satisfy basic needs. However, it can be argued
that in affluent societies where people can expect to live ever longer
and thus spend a significant amount of their lifetimes in retirement,
more and more people demonstrate negative time preference, meaning they
value future consumption during their retirement more than today’s
consumption. To transfer purchasing power to the future via saving
today, they are thus willing to accept a negative interest rate and
bring it about through their saving behavior. (For more on this, see No End to the Savings Glut, one of the first pieces I wrote after joining PIMCO four years ago.)
Cyclical drivers of lower U.S. rates
Along with the global secular drivers depressing interest rates,
three cyclical forces pulling U.S. rates lower have recently
intensified....
....
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