I recently wrote an article about worldwide low interest rates. This is just an update to that piece.
The German 10-year yield has hit 0.1%. We are not talking about 90-day treasuries here. We are talking about turning over your money for a 10 year period in order to earn one-tenth of a percent of interest per year, which is effectively almost nothing.
In Switzerland, the yield on the 10-year has been in negative territory. It has been as low as -.25%. That is a minus sign. You can turn over your money to the Swiss government for 10 years and pay a quarter of a percent of interest.
I really have no idea how this would work. Do you actually have to write a check for the interest “payments” or do they just deduct the interest that you owe when you get your principal amount back after 10 years?
This sounds absolutely ridiculous and it really is. This is the world that central banking has brought us. Normally we think of higher rates because of inflation, but central bank buying can drive down rates in certain circumstances.
Right now, I believe there is a lot of fear and that is the biggest reason for low interest rates. Money demand is high. Velocity is low. Money is not changing hands quickly because people are scared.
As I said before, if I lived in Greece, I might consider buying a German bond to earn essentially nothing. I might even consider buying a Swiss bond and paying a small amount for the safety. My first preference would be to accumulate some gold if I had a relatively safe place to store it. But the last thing I would want to do is keep money in a bank in Greece.
One other reason for low, or even negative, interest rates is diversifying out of currencies. This logic doesn’t hold up as well for German and other European debt, but it definitely holds up for Swiss debt and the negative interest rates.
If you use the euro or any other currency and you want to diversify, it might make some sense to buy Swiss debt. You convert your money into francs and buy the debt, paying a small fee, which is the negative interest rate. When it is time to get your money back, if the franc has appreciated against your usual currency, then you will be better off when you convert it back, at least as compared to having kept it in your faster depreciating currency.
Again, I would prefer to buy gold, as it acts as a better hedge anyway, but that is not always a viable option for some people. In addition, some people just want further diversification.
I have one last question on this topic. If you buy a bond with negative interest rates, do you get to write this off as a loss on your taxes?