Life below Zero: Dealing with Negative Interest Rates

In the past, central banks were able to push short-term interest rates below zero with negative deposit rates but they had limited influence on longer-maturity bonds. When the financial crisis hit in 2007, all this changed, revealing a new unconventional monetary policy that included buying bonds. Since then, central banks have supported pricing by buying sovereign and corporate bonds, thereby depressing yields. Since March 2015, the ECB has been buying 60 billion euros of bonds every month as part of its QE program. It plans to invest 10 to 20 billion euros in government-agency bonds, collateralized debt obligations and bonds issued by European institutions. The buyback program is scheduled to run until September 2016. Around 30% of Eurozone sovereign bonds now carry negative interest rates. Price increases for higher-risk securities show that this has led to evasive activities by investors. This report captures how this wide-scale fall in yields might add to the low interest rate environment and encourage companies to invest and possibly improve growth prospects in the Eurozone.