Skip to main content
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
// //

Imagine a world in which people are punished for saving money.

It's not so far away. In August, the yields on two-year government bonds in Germany, Denmark, Finland and Switzerland fell below zero. Negative rates may soon be coming to North America as well.

At least, that's the contention of some analysts, who say yields on two-year U.S. government bonds could fall close to zero in the weeks ahead – and might even follow their European counterparts into negative territory.

Story continues below advertisement

If subzero rates do come to pass, they will underscore the unusual degree of caution among investors. The world is awash in people and institutions seeking a refuge for their wealth, even if the price of safety is a small loss.

Negative rates would also spotlight the confusion on display in the markets, where ultra-low bond yields suggest a deflationary future while rising gold prices signal inflationary fears.

Part of the apparent confusion stems from the unconventional moves that central banks are making to stimulate the economy. The U.S. Federal Reserve, for instance, has instituted three rounds of "quantitative easing" to help drive down interest rates, particularly for benchmark 10-year bonds.

In a recent opinion piece in the Financial Times, Peter Fisher, the head of fixed income at Wall Street giant BlackRock, argued that the Fed's policy of holding down longer term interest rates is hurting the economy because it is reducing banks' incentive to lend and increasing the incentive for people to hoard cash.

But while the Fed may be pushing down long-term rates it has been helping to support shorter term rates through other means.

In a report this week, the research team at Pavilion Global Markets Inc. argue that the Fed has been a key player in keeping the yield on U.S. two-year bonds above zero.

Problem is, some of the Fed's support for yields is on the verge of disappearing, making zero rates or even negative ones a distinct possibility.

Story continues below advertisement

One factor supporting yields has been the 0.25 per cent interest that the U.S. Federal Reserve pays on excess reserves that U.S. commercial banks deposit with it. This acts as a floor for interest rates, Pavilion argues.

A second factor has been Operation Twist, a manoeuvre in which the Fed is purchasing Treasury bonds with longer maturities and selling short-dated Treasuries, such as the two-year note. This pushes down the price of the short-dated bonds. Since bond prices move in the opposite direction to yields, it also pushes up rates.

Operation Twist is set to expire at the end of this year, removing a key prop from the market.

When that happens, two-year U.S. bonds are "at risk of losing [their] anchor and looking increasingly European, i.e. negative," Pavilion concludes.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies