Thursday, July 14, 2016

Negative Yields? Yikes. A Quick Explanation Of What They Are and What To Do

What an interesting statement! Of course I will relate it to the negative-yield environment we currently find ourselves in as investors, but still, I think this statement is powerful and has broad application to our lives in general.

This statement from a Bloomberg article seems to make the most sense for a quick snapshot of understanding:

"In this upside-down world, borrowers get paid and savers penalized. Crazy as it sounds, several of Europe’s central banks cut key interest rates below zero in 2014, and now Japan has followed. By mid-2016, some 500 million people in a quarter of the world economy were living with rates in the red. Unthinkable before the 2008 financial crisis, the idea is to jolt lending, spur inflation and reinvigorate the economy after other options have been exhausted. It's an unorthodox move that has distorted financial markets and triggered complaints that the strategy is backfiring. Negative rates will either mark the start of a new era for the world’s central banks, or finally expose the limit of their powers."

Wow. 500 million people experiencing negative interest rates!! Look at the negative interest rate loan growth as shown in the graph below:

I think this quote also does a good job explaining what they are:

"Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans."

So, in conclusion, the key takeaways for us are:

1) First, to be aware that this trend is occurring. I guarantee a lot of Americans aren't aware.  There is power in knowing what is going on at a macro-economic scale.

2) Secondly, to understand that this trend is going to distort markets.  I recently wrote a guest post for Captain Dividend that describes this phenomenon briefly, and that article will be published in the next few days.  But expect a high chasing of yield!

What do you think about all of this? I'd love to hear your comments below,

Passive Income Dude


  1. I think it is very interesting how many countries have adopted these policies. I have not researched must about it but I am very aware of the countries that are doing it and the debate almost everyday on CNBC about interest rates. Ironically today the BoE talked about interest rate cuts potentially in August so are they next?

    High yield chasing is and will continue to happen in this environment. Good for us who are already in it as it drives up the price! To your comment on IH it actually makes sense to consider total return but I guess my question is that if I am holding it for less than a year do I just take the short term capital gain or not?

  2. Hi Millennial Budget,

    All interesting points. I just read this morning that Germany now issued a 10 year bond with a negative yield, the first country to do so with such a long duration. Crazy to think that people have to pay to give Germany their money!

    As to my comment on total return, this is such a delicate decision. First, it is very hard (call it impossible) to time the market. Second, you could be off on your assessment of fair value for the particular company. I think I tend to fall in the category that though you may not be at the exact top or bottom, there are indicators that tell you when things are very out of whack. And when that happens, trim the holdings and replace with better ones. You don't have to sell everything but lower the weight...This can still allow you for upside while increasing your portfolio's yield.

    Keep in touch,

    Passive Income Dude