Negative Interest Rates: Not Here Yet, but Damage Already Being Felt

Negative Interest RatesFor retirement savings that are invested in bonds or fixed-income securities, the devil is called “negative interest rate polices” (also known as “NIRPs”).

Currently, there are five major world central banks that have fully implemented NIRPs. If you follow the financial markets closely, like I do, there isn’t a day that goes by when we are not hearing something about NIRPs.

U.S. investors believe negative interest rates aren’t something they should be concerned about. They believe they’re too far away from them, as these policies are being implemented by central banks across the pond in Europe or even further away in Asia. Americans have heard the Federal Reserve will be raising rates because the economy is slowly improving here. To this I say, don’t be too quick to judge.

In fact, a major Canadian bank, yes our neighbor to the north, just issued negative interest rate bonds—and demand for the bonds was overwhelming.

The Canadian Imperial Bank of Commerce (NYSE:CM), one of the biggest banks in Canada, just sold negative-yield bonds without a problem. It raised $1.8 billion by selling six-year bonds that yield minus 0.009%. (Source: “CIBC sells negative-yield bonds for 1st time,” CBC News, July 19, 2016.)

Yes, this just happened in Canada. This proves it’s not just a “far away” phenomenon anymore, that negative interest rates are not just limited to Europe or Japan.

A fact you should know about: according to data compiled by Bloomberg, almost $12.0 trillion worth of debt around the world has a negative yield and the majority of this debt has come from governments.

Negative interest rates could have dire consequences for those who are saving for retirement, so don’t rule out negative yields coming to the United States.

There are at least three things you should remember when looking at negative rates:

1. You Will Be Punished to Have Cash

I have talked about this phenomenon before. If you have cash in an account at your bank, while NIRPs are not in America yet, you could find yourself paying your bank higher fees. This has the same effect as negative interest rates, as you are paying your bank to hold your cash.

2. No More Fixed-Income Choices

What do you do once you are ready to retire and have money saved up? Years ago, if you had savings at the time of your retirement, you would put your savings into fixed-income securities like Treasuries and other instruments, like certificates of deposit (CDs), and earn a fixed income—be it monthly, quarterly, or yearly.

With negative interest rates, forget that plan. You just can’t do that. Consider CIBC’s negative interest rate bonds. They were just sold to investors in lots of $100.054 each. At the end of six years, those investors will get $100.00 back. Investors in these bonds are basically paying to have their money held safe.

3. Asset Bubbles Always Burst

So, if your savings accounts and bonds are not making money, what else can you do? Investors in search of positive yields will be forced to move toward risky assets like stocks. Unfortunately, this sort of behavior promotes complacency and essentially creates bubbles in other asset classes.

Consider the current state of the U.S. stock market. It’s not rising based on fundamentals. The only thing keeping stocks higher is the lack of returns elsewhere. Investors are ignoring declining earnings, ridiculously rich valuations, the poor state of the U.S. economy, and weak global economic conditions, and are moving toward stocks because bonds don’t pay anymore.

Dear reader, this is not the best time in history to be a saver. And it’s not the best time in history to invest in the stock market because stocks, based on historical valuation tools, are very overpriced.

I would plan for negative interest rates coming to America. If you don’t want the risk of the stock market but want a decent return on your money, I would opt for quality corporate bonds issued by major American corporations (for example, the Dow 30 companies). I would opt for them because as we move toward negative interest rates, the value of those bonds could rise sharply.