Negative rates to shake up financial system, say
experts
Ralph
Atkins and Elaine Moore in London
Monday,
16 Feb 2015 | 5:27 AM ET
Financial Times
Falls in European interest rates
into negative territory could profoundly affect the workings of the financial
system and there is little chance of benchmark borrowing costs rising in the
year ahead, top investment managers and strategists have warned.
Yields, which move inversely with
prices, have this year dropped below zero on a rapidly expanding range of
European governments' bonds - and even some corporate bonds. The declines,
which are driven by the European Central Bank's "quantitative
easing", mean historically low borrowing costs. But senior finance experts
interviewed by the Financial Times saw worrying side effects.
"This could be the makings of a
completely new environment for global bond markets," said Andrew Milligan,
head of global strategy at Standard Life Investments, at the FT's debt capital
markets conference in London. "If it actually becomes permanent . . .
There could be some very significant capital flows."
"It has a huge impact on a lot
of simple things like pension funds and insurance companies, and how their
whole model works," said Henry Cooke, executive director, Gryphon Capital
Investments. "It is putting them under a lot of pressure . . . and when
people are put under a lot of pressure, they take a lot more risk."
Negative interest rates mean
investors, in effect, pay to lend their money. Jerome Booth, former head of
research at Ashmore Group, said: "It is perfectly acceptable for a
government to try to get a negative yield - it sounds a good deal. The problem
is: why would investors do it?"
The ECB's action has forced
countermoves by central banks outside the euro zone. Danish and Swedish
five-year bond yields ended last week at minus 0.48 percent and minus 0.04
percent. Neil Williams, group chief economist at Hermes Investment Management,
said: "It smacks, surely, of the first signs of what you could call a
currency war. Not all central banks can push their currency down sufficiently
to stoke up demand . . . I am not so sure it is the solution." Some $2tn
of European government bonds over more than one year's maturity have negative
yields, according to JPMorgan.
Yields are also negative on Swiss
government bonds, and earlier this month turned negative on some
euro-denominated debt issued by Nestlé, the Swiss food manufacturer.
Finance experts did not have high
expectations of an early end to the era of ultra-low interest rates in
continental Europe. German 10-year yields ended Friday at 0.34 percent,
compared with 0.54 percent at the start of the year. "Near zero for the 10-year
yield for Germany is not unlikely," said Pascal Duval, chief executive for
Europe at Russell Investments.
The investment specialists expressed
concern whether QE would boost economic growth in Europe, but argued it was
needed to fight deflation threats. "It creates the best opportunity for a
good outcome in Europe," said Martin Reeves, head of global high yield at
Legal & General Investments.
However, UK and US market borrowing
costs could increase this year on the back of possible interest rate rises by
the Federal Reserve and Bank of England, the experts reckoned. Mr Reeves said
wage inflation in the US and UK would "push up government bond yields
around the world - and probably quicker than people think because everyone has
got so bearish."