Money Matters

Going Negative

Going negative is not a term suggesting you shed your clothes and romp through the jungle looking for wild boar to eat.

Going negative is when you loan someone money and when they pay you back, they give you less then you loaned them and pay you no interest to boot. This is known as a negative yield.

An example would be you loan someone a $1,000.00 and they use it for a year, then pay you $990 dollars to settle the loan. Going negative means just that. Instead of earning any interest on your money, you actually get back less than what you loaned out.

Why would anyone do this?

Although it sounds like a raw deal and only for the galactically stupid, many large institutions are doing just that: loaning out their money for negative yield.

This “going negative” is a rare occurrence but recently it is becoming far more common than you might imagine.

In our world of falling interest rates, where even our central bank, the Federal Reserve has dropped interest rates to almost zero and you get next to nothing in a savings account,
many countries are now offering to borrow money for no interest and then repay less than the original amount loaned to them.

The thinking is interest rates will not rise anytime soon because the economies of the world are hemorrhaging cash and things might get even worse than they are now.

With billions in manufactured cash from all the Quantitative Easing (QE) programs around the world, and most of that money going to financial institutions, these institutions need massive hiding places to invest that money and even loaning it out at a slight loss is better than risking even bigger losses in ailing stock markets.

Another concern is by loaning money to financially strong countries or institutions no matter what the return means at least you will get your money back and in a world where defaults and bailouts are the norm, getting 99% of your money back is better than losing all or a big chunk of it.

How prevalent are negative yields?

85 of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have negative yields, according to data compiled by Bloomberg news.

Germany recently sold five-year notes at an average yield of minus 0.08 percent on Wednesday which is a Euro area record. This means investors buying these securities will get .08% less in principal back when the debt matures in April 2020.

As odd as this is, it is becoming more and more popular and the current rates is likely to go even further in the red.

The real issue is what are negative interest rates saying about the perceived safety of debt in general and the so called recovery of our world economies where accepting a guaranteed loss on principal is the most desired option.

Although monetary authorities everywhere assure us everything is fine and under control, the public debt markets where these negative yields are becoming the norm is telling us something quite different.


This article expresses the opinions of Marc Cuniberti. Mr. Cuniberti hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon and syndicated on over 35 radio stations throughout the US and Canada. He has been featured on NBC and ABC television and on a host of made for TV documentaries for his economic insights. His website is www.moneymanagementradio.com.