Back in 2016, we wrote “Watch out! Negative interest rate policy is coming to the US sooner than later.” To us, the future feels inevitable with virtually all the other developed nations in negative territory again in 2019. PIMCO's Joachim Fels echoed this thought saying that it's “no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.”

The market is now pricing in 4-5 more 25bps rate cuts by the end of next year which would drop the Fed funds rate to below 1%. If the economy weakens further, it isn't hard to imagine a scenario where the Fed would consider going to negative territory.

Here is the ugly situation.

 

Record lows in Switzerland

This week in Switzerland, the yield on the Swiss 10-year government bonds hit a record of low of -0.95% and the yield on the 30-year fell to -0.436%. This seems like insanity. You have to pay the government interest to hold your cash safely for over 30 years!

switzerland-30-years-bon

Chasing yields

Negative rates are forcing investors to take on more risk to find returns. It makes you to think about what would I rather own for the next 10 years: a government bond with guaranteed negative return or owning a stock or ETF with a dividend and better growth prospects.

This will take expertise to navigate as many retirees can't afford to take too much risk. No one wants to have to worry about suffering severe losses like in the Great Recession.

What will you do if negative rates come to the US?

“Interest Rates” by 401(K) 2013 is licensed under CC BY-SA 2.0