Last year the Fed raised the federal funds rate for the first time since 2006. While the raise was a measly 0.25%, it was a long overdue indicator of what seems to be a stable economy. The rest of the world is in a different situation though. Last month we saw the Japan join Sweden, Switzerland and Denmark in adopting a Negative Interest Rate Policy or NIRP in hope of jumpstarting their struggling economies.
Now it wasn’t too long ago that the Fed dropped U.S. interest rates to 0% in order to stimulate our own economy, but this is a different animal. We’re talking about 10-year treasury note yields in some of these countries too not just their funds rate. Imagine loaning money with the promise to get back less than what you loaned them.
For example, right now for every $100 invested in Swiss two-year notes, investors would receive back a little more than $98 two years later and get paid nothing in the meantime. †
You might be wondering how this affects you. A lot of potential outcomes are actually beneficial to us here domestically. This easy money policy abroad could be good for foreign equity and high yield markets as it was in the U.S. when we implemented it.
Another impact some analysts think we are seeing right now is downward pressure on U.S. government yields. 1.88% yield on our 10-year bond may not seem great to us, but Europeans can’t get anywhere near that out of their government debt. This makes our bonds pretty valuable to them and, as we know with bonds, as price goes up yield goes down. So try as Janet Yellen might to give us an increase in our historically low rates, her efforts may be offset by the opposite happening around the globe.
This has never happened before, ever!
† According to Bloomberg
All the best,
Wesley R. Nicholson, Mike Allen and Aaron Everdyke
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