Negative rates have a less “distortive” effect on the market than quantitative easing, say fixed income experts at Henderson Global Investors, despite the actual repercussions of the negative interest rate policy being uncertain.
In January, the Bank of Japan moved to negative interest rates in a surprise move that followed other major European banks that had also adopted such a policy.
Experts have recently warned a spread of the policy might lead to unintended consequences, including erosion of bank profitability, pressure on non-bank financial institutions and making the “safest” asset classes, such as government and other high-quality bonds, riskier.
However, Henderson Global Investors head of fixed income Phil Apel says in the current cycle, with interest rates already at emergency levels and with little scope to raise them significantly, moving to negative rates is “an elegant solution”, and believes the policy will remain in place for some time.
He says: “While it is difficult to envisage all the potential repercussions, we believe negative rates appear less distortive than continued balance sheet expansion and associated asset bubbles.
“While easing programmes could be expanded further into corporate bond and equity purchases, in Europe this is currently seen as being too risky, and with potential legal implications.”
Apel and Mitul Patel, head of interest rates at Henderson, say negative rates have positive implications for bond yields with the immediate result being lower yields as prices rise, leading to a pick-up in demand for government bonds.
They duo say: “A longer-term benefit of negative yields is that they remove concerns over the cost of servicing government debt and arguably open the door to further borrowing.
“A criticism of the response to the 2008 global financial crisis was the lack of fiscal stimulus given the understandable lack of political appetite to borrow more money. Removing this barrier would give policymakers a significant weapon in combatting the next downturn through expansionary fiscal policy.”
However, Apel and Patel say negative rates could potentially cause funding issues for banks and limit their ability to lend to the real economy.
In addition, with fewer low-risk assets offering an acceptable return, savers might have to save more at the expense of consumption, the fund managers add.