Once upon a time, we all thought that the lowest interest rate could possibly go was zero. However, the actions of European central banks have thrown this assumption on its head. Fifteen percent of global sovereign bonds are now trading with a negative yield. These extremes are creating strains and distortions, including in New Zealand’s financial markets.
In the 1990s, following the Japanese sharemarket and property crash, the Bank of Japan cut interest rates, and instituted their so-called ‘zero interest rate policy’ (ZIRP). At the height of the GFC in 2009, the US and UK stopped just short of zero, leaving overnight interest rates at 0.25% and 0.5% respectively. Quantitative easing (QE) programmes were designed to bring down longer-term bond yields.
In recent months, the boundaries of central banking have been tested once again, with the ECB, Swiss National Bank, National Bank of Denmark, and the Riksbank (in Sweden) all setting overnight interest rates below zero. Indeed, German and Swiss government bonds are trading with negative yields to maturities beyond 5 years.
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