The U.S. Is on the Edge of the Global Negative Interest-Rate Club
If the economy stumbles, Federal Reserve cuts and bond buying may push bond yields across the zero line.
Government bonds in Denmark, Germany, Japan, Sweden, and Switzerland carry negative yields—meaning it will cost money for investors to hold them to maturity. A big question for fixed-income markets in 2020 is whether it could happen in the U.S., too.
Bond yields fall when their prices rise, and in August investors piled heavily into U.S. Treasuries, driving yields on the benchmark 10-year bond to a three-year low of 1.43% by early September. Yields have climbed back some since, to around 1.8%, but investors are still getting a razor-thin income for lending to the U.S. government. (Over the past 20 years, the average is 3.5%.) There are several reasons why that matters. First, the yields on these bonds help set the pace for long-term borrowing costs throughout the economy, whether home loans or corporate debt. But they also reflect investors’ sentiments about the economy. And the story these low yields tell isn’t rosy.