The View | How to survive in the brave new world of negative interest rates
The new portfolio for perilous times is high quality bonds, gold and some cash
It remains an article of investment faith that low interest rates translate into stimulus and growth, but history and current events are proving this to be dangerously wrong. Negative interest rate bonds and bank deposits have become an expanding asset class.
The trade started in smaller countries then spread to Germany and Japan. Today there are close to US$17 trillion of negative yield sovereign bonds. And their issue by central banks is setting up another financial and political crisis that regulators and central banks will be unable to stop.
Central banks have rewarded the return-seeking bond buyer and they’ve done nothing but penalise the income-seeking bond buyer and depositor
This colossal debt issuance compounded the credit folly of the 2008 crisis to spawn problems you can see from America to Hong Kong. Little of the increased corporate or government borrowing due to low rates trickled down into creating jobs or real income growth.
Real wage growth has been non-existent for more than a decade in the US and Hong Kong. To fund the artificially low interest rates, central bank balance sheet expansion required the imposition of negative rates. This means charging you interest penalties if you don’t buy longer term bonds.
Now your average portfolio investor and retiree living off savings have been cruelly deceived with this distortion in saving principles. Venturing into negative yield has potential if you’re an investor looking for a percentage return on your bond portfolio. It is terrible if you’re an investor looking for an income from your bond portfolio.
Over the past seven years, central banks have rewarded the return-seeking bond buyer and they’ve done nothing but penalise the income-seeking bond buyer and depositor. It’s almost immoral to charge people for keeping savings in a bank, but that is where we seem to be headed.