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Economists never thought this could happen

Duncan Richardson, News Editor
6 Feb 2015, 11:55 a.m.

Interest rates on some sovereign debt and corporate bonds have turned negative. For example you lend a country or company say £100 and then in five years’ time they give you less than that back.

Government bonds are negative in Germany, Switzerland, Sweden, Austria, Netherlands and now Denmark. Early this week Nestle bonds turned negative and for a brief time so did Shells. Historically economists thought rates would never go negative as they thought investors and depositors would instead hold onto their cash.

There are a number of potential reasons to explain this phenomenon. The first explanation is simply the supply demand dynamic. A lot of European investors are worried over the health of the European economy and would rather except a negative rate rather than expose their capital to riskier investment such as equities or leave their money in a highly leveraged financial system. As a result sovereign debt of well-run northern European countries such as Germany are in high demand. In addition these countries are not issuing new debt so supply is constrained.

Quantitative easing has also played its part. By driving down the cost of borrowing for the highly indebted member states such as Greece and Portugal it stands to reason that rates on more prudent countries debt will be lower. If rates in Greece, Portugal, Ireland and Spain had not fallen the changes are these countries would now be bankrupt.

Negative interest rates should help boost the gold price as many institutional investors shun gold because it is a non interest bearing asset.

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