Investors are losing approximately $24 billion per year because of central banks pushing interest rates to below zero in an effort to spur economic growth that hurts savers and boosts lending.
According to a new report from credit analysis firm Fitch Ratings, negative interest rates are generating negative-yielding government bonds that costs investors billions of dollars per year. Researchers say the subzero interest rates are posing “challenges to long-term investors that rely on sovereign debt as a bedrock of their portfolio.”
The subzero rates are leading to reduced income from government securities. Investors, savers and retirees lose income because banks, pension funds, money market funds and insurers don’t have the necessary funds to pay them. This is why Citigroup recently noted that pension funds face deficits of $520 billion and are underfunded by an astounding $78 trillion.
“[Pension deficits are] a ticking time bomb,” Charles Millard, managing director of pension relations at Citigroup, told the Financial Times. “Unfortunately it is one that will explode slowly so it never creates the feeling of a crisis. The good news is that there is time to make repairs. The bad news is that without a crisis we do not tend to make those repairs.”
Fitch experts are concerned that negative-yielding government bonds are also prompting investors to purchase junk bonds, which are also facing troubles of their own (SEE: Warning for Investors: Beware of the coming pop in the junk bond bubble).
“There is some evidence that such policies are pushing some investors into riskier assets, but it is too early to see whether this is a sustained effect,” Fitch says. “In any case, the risk of unintended consequences does appear to be rising as banks, consumers and businesses adapt to a more uncertain economic environment in which negative interest rates are increasingly common.”
Denmark, Japan, Sweden and Switzerland and the European Central Bank (ECB) have all instituted subzero rates to encourage lending and/or to stabilize their currencies. The ECB has taken a lot of heat over its quantitative easing program – buying government bonds and decreasing interest rates – because it hasn’t led to much economic growth.
The Federal Reserve has said that it’s open to subzero interest rates in the event of an economic catastrophe. The Bank of Canada uttered the same words. Japan confirmed that it could slash rates even further if the economy doesn’t get better. Ostensibly, 2016 is certainly the year of negative interest rates.
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