Negative Rates Series: Can Central Banks Digest Their Own Negative Medicine?

Negative Rates Series: Can Central Banks Digest Their Own Negative Medicine?

22 April 2016, 12:28
Roberto Jacobs
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Negative Rates Series: Can Central Banks Digest Their Own Negative Medicine?

Central banks around the developed world, increasingly pushing the yield curve towards zero, either through asset purchase or through introduction of negative rates. After Japanese government introduced negative rates, first time ever, this year, almost $6-7 trillion bonds are now trading in negative territory.

As central banks need to preserve their capital, can they really digest their own medicine?

If central banks lose money while parking it, that may cause huge political storm.

So, with $10.9 trillion Dollar under management, they are the biggest investors in hunt for positive yield and without that central banks will have to shift away from safe assets to relatively riskier ones. This could be another reason, why government bonds with positive yields are seeing high number of bids and yields at longer end of the curve dropping fast.

Think of it, if central banks need to venture on riskier (relatively) assets, fund managers will dive even further, very well fuelling the current risk trends.

In such a case, tightening from FED gets nullified and fails to spark risk aversion as investors anyway keep piling into treasuries and riskier assets. This also makes bull case of commodities such as Gold, Silver, Copper or any store of value.

This risk loving trend will intensify as rates begin to move further negative in economies like Euro Zone, japan.

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