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On this episode, show hosts Dan Mikulskis and Mary Spencer are joined by David Wrigley to discuss negative rates and whether it can be deemed a success. 

They discuss 

• Negative rates have been in place in Europe and Japan for some time. It is not obvious (yet) whether it can be deemed a success.
• Effect of negative rates on individuals and banks: savings rates, mortgages
• Remarkably, swap rates suggest that interest rates could be roughly zero for the next fifty years
• So the market is not expecting this to be a short-term emergency thing
• But what do negative rates mean, is there a real difference between 0.01% to -0.01%?
• Effect on pension schemes –discount rates fall increasing liabilities (and deficits)
• Where that leaves us from a financial theory perspective – lots of asset returns are assumed to be based off risk free rates, but that theory wasn’t produced at a time when they were negative
• Tug of war between huge issuance of gilts, and buying from Bank of England through QE program. Classic supply and demand thinking has not really held true in gilts for a long time
• Beneficiaries of negative rates: government and tax payers, low cost to fund projects
• Why what really matters is REAL interest rates, that is, relative to inflation
• Inflation could go negative in August
• Don’t forget Brexit – a lot of forces in the mix over medium term
• Gilt yields are negative, but they could get more negative. Lots of potential outcomes on both sides
• Don’t forget, for almost all of the last 20 years people have looked at gilt yields and said … “they must go higher”. Rates have been on a downward trajectory and its easy to get anchored. There are almost always arguments both ways, which is why many investors and pension schemes hedge
• How we might look back on this in 10 years?

Useful links referred to in our podcast this week

• UK 3 year yields go negative
• Should the Fed cut rates below zero?

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