Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

A reader sent in a very relevant question last week: “If we head towards negative interest rates like some parts of the world, where does one invest their money to earn a decent return?”

We may be closer to this scenario than most people think. The entire U.S. Treasury bond yield curve dropped below 1 per cent last week for the first time in history.

On Sunday, the U.S. Federal Reserve slashed rates back to near zero, restarted bond buying and launched other measures. This followed the Bank of Canada last week announcing its second half point cut this month, to 0.75 per cent, saying: “It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy. In addition, lower prices for oil will weigh heavily on the economy, particularly in energy intensive regions.”

Story continues below advertisement

All this raises the spectre of negative interest rates here.

We’ve already seen them for some time in continental Europe and Japan. Now the U.K. has joined the club, with yields on two- and five-year government bonds (called gilts) dropping below zero on March 9.

According to a recent report from Bloomberg, almost US$15 trillion worth of investment grade debt, more than a quarter of the global total, is in negative territory, including all of Germany’s government bonds.

This means that investors who buy now will get less money back than they invested when the bonds mature.

Why would anyone do that? Fear. These people are telling the world they expect stocks, real estate, and all other assets to lose significant value in the years ahead. They would rather commit to a small loss over time than run the risk of catastrophic losses in other assets.

The big question is whether negative rates actually work to stimulate an economy. The jury is still out on that, even after several years of living with them. The Wall Street Journal reported in December that senior monetary policy staff at the European Central Bank (ECB) published a paper saying the benefits for the economy outweighed any damage from below-zero rates. These included lower borrowing rates and increased inflation.

The team that prepared the report was led by Massimo Rostagno, head of the ECB’s monetary policy division. It concluded that negative rates encouraged commercial banks to lend and invest capital, rather than pay to leave money on deposit at the central bank.

Story continues below advertisement

The downside of negative rates is that they squeeze bank profits, forcing them to jack up fees on their other services to the detriment of their clients. That’s not all. Pension plans, which have large bond holdings, will be hard-pressed to meet future obligations if their fixed income assets generate negative returns for a lengthy period of time. Insurance companies would also face problems, for the same reason.

Another negative effect of negative rates would likely be to exacerbate the housing bubble that is already making home ownership a distant dream for young people. Zero or negative mortgage rates would send house prices soaring.

The effects on the stock market are debatable. Some analysts believe negative rates would drive up stock values, especially those of dividend-paying securities. Others see negative rates as a depressant because they signal worse times ahead. European and Japanese markets have not been stellar performers in recent years, but they held up reasonably well until the recent sell-off.

In short, we’re moving into new territory and no one really can predict the consequences, especially if negative rates become an entrenched part of North American monetary policy for any length of time.

So, to go back to the reader’s question, where do you invest in these circumstances? Bonds, real estate, and gold look like the best choices. If you don’t like any of those, hold cash, even if your account pays zero interest. It’s better than investing for a guaranteed loss.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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:

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

Comments that violate our community guidelines will be removed.

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