The short term interest rates around the world have been interesting to watch of late – more and more short term government bonds are going into negative interest rate territory. As of this writing, the German and the Swiss 2 year bond is yielding a negative market rate. Even the Bank Of Japan 2 year bond market rate is negative, which given the Japanese government huge debt issues, has me confounded.
I have yet to wrap my head around why someone would buy a security in which the promised rate of return is less than what you put into it, unless you are looking at money as a commodity, in which case you are OK paying a storage fee. Perhaps the next great invention will be using stacks of money as home insulation, or maybe governments should just start minting $1000 coins making it easy to stash a fortune in the backyard.
While I have yet to see any American debt instruments go negative, we finally hit a 0% rate. The Government Inflation adjusted savings bond rate came out on May 1st, and here is the interest rate for the next 6 months:
Purchasers of I-Bonds must keep the bond for a minimum of 1 year, and pay an interest penalty for withdrawals before year 5. So why would someone put money in an I-Bond, instead of just putting it in a bank or credit union and getting a whopping .10% interest rate? Since I-Bond rates reset every 6 months, purchasers today are guaranteed a rate of 0% until November 1st.
Perhaps this is a forecast that that negative short term rates are coming to the United States. Perhaps we soon will see banks and credit unions unable to pay interest on deposit accounts, and institute account fees higher that effective interest rates. If that will be the case, I-Bonds do make a reasonable alternative – because if deflation heats up, I-Bond holders never see the rate go below 0%.
Who would of thought 7 years after the financial meltdown the financial markets are still in turmoil and rates are still at Keynesian stimulus levels. Perhaps paying interest on deposits is becoming an antiquated notion, a victim of the financial crisis. Or this has to be some sort of distortion, or bubble, in the currency markets – that will have to work its way out.