Joe Weisenthal has been causing a stir on Twitter discussing "yield bugs": people who have an ideological belief that bond yields out to be positive. This Bloomberg opinion piece discusses this, as well as some other comments on negative yields coming to the United States. I have not followed that debate too closely, as I initially assumed that there was not a whole lot of people who believed that bond yields ought to be positive. This is because bond yields are essentially determined by central bank expectations, and there is not a lot stopping central banks from pushing short rates to negative values.
The figure above shows two key U.S. interest rates -- the Fed Funds rate, and the 10-year Treasury yield. Although the Treasury yield is set in a market, arbitrage relationships mean that it cannot march off completely independently of what the central bank is expected to be doing. It is not set by "savers" deciding what rate of interest they would like: as pension funds who failed to liability match discovered the hard way, "savers" in the bond market are price takers.....MORE
If the New Keynesians at the Fed want to march the Fed Funds rate negative, Treasury yields will follow suit. Yields can stay positive if investors expect a reversal of policy in the medium term, of course. However, given the track record of the New Keynesians, the policy rate is still stuck on tracks that are heading downhill. If a decent-sized recession hits within the next five years, it seems a near certainty that rates will end up as negative as the Fed thinks they can get away with.
The belief that "money" with a 0% interest rate will be an insurmountable barrier is a pipe dream: no large investor is going to stockpile bills in large amounts....
See also:
"Cash Escape Inhibitors or How Low Can Negative Rates Actually Go?"
"Hitler finds out about negative interest rates."
