Investors Losing Billions on Central Bank Monetary Policy
Investors are losing billions a year from central banks that have set interest rates below Zero in an effort to stimulate economic growth by punishing saving and encouraging lending.
Negative-yielding government bonds cost investors about $24-B a year, according to calculations from Fitch Ratings, a credit analysis firm. The below-Zero rates pose challenges to long-term investors that rely on sovereign debt as a bedrock of their portfolios.
Countries such as Japan, Switzerland, Sweden and Denmark have implemented negative interest rates to boost lending or stabilize currencies.
The European Central Bank (ECB) last year instituted a negative interest-rate policy before changing course to QE (quantitative easing) like the US Fed. QE is a program of buying government bonds and other debt to push down interest rates, which move in the opposite direction of bond prices.
The lost income from government securities is hammering insurers, banks, pension funds and money-market funds that need investment proceeds to pay investors and retirees.
Citigroup (NYSE:C) this year estimated US and UK companies have pension deficits of $520-B and are underfunded by $78-T.
Another worry is that negative-yielding government debt is driving investors to buy junk bonds to boost their income.
“There is some evidence that such policies are pushing some investors into riskier assets, but it is too early to see whether this is a sustained effect,” Fitch says. “In any case, the risk of unintended consequences does appear to be rising as banks, consumers and businesses adapt to a more uncertain economic environment in which negative interest rates are increasingly common.”
These actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk, with potentially dangerous financial and economic consequences. There is a level of fragility in the global economy that we have not seen since the lead-up to the Y 2008 financial crisis.
Thursday’s US major stock market indexes finished at: DJIA +9.45 at 17660.71, NAS Comp -8.55 at 4717.09, S&P 500 -0.49at 2050.63
Volume: Trade was above average with 949-M/shares exchanged on the NYSE
- NAS Comp -5.8% YTD
- Russell 2000 -2.4% YTD
- S&P 500 +0.3% YTD
- DJIA +1.4% YTD
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