Tags: NIRP | ZIRP | financial crisis | yield

Fitch: Negative Bond Yields Take $24 Billion a Year From Investors

Fitch: Negative Bond Yields Take $24 Billion a Year From Investors
(Dollar Photo Club/Rob Williams)

By    |   Thursday, 05 May 2016 08:54 AM

Investors are losing billions a year from central banks that have set interest rates below zero in an effort to stimulate economic growth by punishing saving and encouraging lending.

Negative-yielding government bonds cost investors about $24 billion a year, according to calculations from Fitch Ratings, a credit analysis firm. The below-zero rates pose “challenges to long-term investors that rely on sovereign debt as a bedrock of their portfolios,” the Financial Times reports.

Countries such as Japan, Switzerland, Sweden and Denmark have implemented negative rates to boost lending or stabilize currencies. The European Central Bank last year instituted a negative interest-rate policy before changing course to quantitative easing like the Federal Reserve. QE is a program of buying government bonds and other debt to push down interest rates, which move in the opposite direction of bond prices.

The lost income from government securities is hammering insurers, banks, pension funds and money-market funds that need investment proceeds to pay investors and retirees. Citigroup this year estimated U.S. and U.K. companies have pension deficits of $520 billion and are underfunded by $78 trillion, the FT reports.

“[Pension deficits are] a ticking time bomb,” says Charles Millard, managing director of pension relations at Citigroup, according to the newspaper. “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.”

Another worry is that negative-yielding government debt is driving investors to buy junk bonds to boost their income.

 “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.”

BlackRock’s Laurence D. Fink last month said negative interest rates are “particularly worrying” in a weak economy.

“These actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk, with potentially dangerous financial and economic consequences,” Fink wrote in an annual letter to shareholders. There is “a level of fragility in the global economy that we have not seen since the lead-up to the financial crisis.”

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Investors are losing billions a year from central banks that have set interest rates below zero in an effort to stimulate economic growth by punishing saving and encouraging lending.
NIRP, ZIRP, financial crisis, yield
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2016-54-05
Thursday, 05 May 2016 08:54 AM
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