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Negative interest rates: Don't expect to get paid to borrow money



Negative interest rates are a real thing. But don't expect your local bank to start paying you to borrow money.

President Trump kicked a hornet's nest this week as he tweeted that the Federal Reserve should cut interest rates "to zero or less." He responded to the growing volume of foreign government bonds and other debt instruments – now a total of $ 15 trillion – that have negative interest rates. Most are issued by governments in Western Europe and Asia in the hope of starting their stagnant economies.

Trump apparently believes that the United States, thanks to the Fed's "bones," misses a chance to refinance its debt at ultra-low costs. Some financial experts may be citing severe reactions from markets, calling his proposal "a recipe for disaster."

When bond yields become negative, the download effect on consumers can be jarring. Two Scandinavian banks recently offered fixed-rate loans that did not require either interest rates or a 0.5% negative interest rate, which means ̵

1; if you don't count different fees, mortgage loans would pay less than they had originally borrowed.

The United States, rates remain well above zero on mortgages and other debts, and are likely to remain so, analysts said.

"It's just not relevant here in the United States; This is a lot about nothing, says Greg McBride, chief financial analyst at Bankrate.com. "We are a long, long way from this" in the United States, he said.

To be sure, interest rates in general in the United States are also declining, partly fueled by concern that the US economy is slowing down and the Federal Reserve's July decision to reduce its short-term mortgage loan for the first time since the severe recession of ten years since.

The Fed had kept interest rates near zero to help pull the nation out of that recession, and then lifted interest rates nine times from the end of 2015. The Fed's latest quarterly rate cut lowered interest rates to a range of 2.25% to 2.5% , and many expect another cut next week as the central bank tries to keep the long-term US economic expansion intact.

But concerns about the economic outlook remain low while inflation remains low, two reasons why government bond prices have risen and their returns have fallen in recent months as investors sought alternatives to riskier investments such as equities. For example, the yield on a 10-year government bond fell to 1.90% on Friday from almost 3% a year ago.

In turn, interest rates on mortgages and new car loans have gone lower this year. The average interest rate on a 30-year fixed rate loan is 3.56%, down from 4.51% at the start of the year, according to Freddie Mac. The rate of a five-year loan for a new car has dropped to 4.62% from 4.96%, Bankrate data shows.

"These interest rates are still far from zero," said David Ely, associate dean of the San Diego State Fowler College of Business. Although lending costs continue to slide, "I wouldn't expect negative interest rates," he said.

The spread of negative interest rates abroad and lower US interest rates is little consolation for Americans with credit card balances: The average interest rate on the cards is 17.8%, and it has not gone very far in the past year, according to Bankrate. Credit card rates are so high in part because card issuers lend unsecured money – meaning it doesn't require collateral – and because credit card balances are often among the debts that only become invalid when people file for bankruptcy, McBride said. [19659002] The low interest rate environment has also had a lid on earnings for American savers in recent years. A one-year certificate of deposit now gives an average of 0.85%, figures from Bankrate show. (Some banks only pay more online.) That's still up from 0.30% three years ago.

"It's a terrible time to be a saver," Ely said.

Countries such as Germany, Denmark and Japan are among those that have issued debt securities in recent years that now have a negative return, usually because securities prices have been bid higher and sent low coupon rates below zero. Bond prices are reversed to interest rates, so when a bond price rises, interest rates fall.

Then last month, Germany sold 30-year bonds with a zero-interest coupon. And because there was good demand for the bonds, the bond price rose, thereby pushing their returns into negative territory.

Germany and the other countries have issued such debt in the hope of keeping lending costs so low that it sparks growth in their struggles with economies.

Trump noted the negative interest rates abroad to bolster his argument that the Federal Reserve should further lower the US interest rate to boost the US economy and keep America competitive in trade. "Germany actually gets 'paid' to borrow money," tweeted last month after the G-7 summit. But unlike Germany, the United States has an economy that is still growing.

Why would anyone buy a government bond that yields negative interest rates, much less than the higher priced ones?

"Because it is the ultimate safe haven, where You are willing to pay the government to save your money" if you are scary for riskier investments like stocks, McBride said. "You are willing to pay it to minimize losses. In addition, institutional investors such as pension funds and insurance companies often have policies that require them to retain part of their investment portfolios in government bonds, even though these investments have a negative return, analysts said.

Peter Heilbron, CEO in Trace Wealth Advisors in Sherman Oaks, said there are also reasons why investors are not shifting much of their assets from bonds to other so-called ports such as gold and short-term money market funds. principal amount and coupon rate for an extended period, while gold prices and money market returns vary constantly, he said. [19659002] That certainty is the key for pension funds and insurance companies, Heilbron said. "If I know I have to fund a future responsibility, and I can lose some money along the way [with negative yields] to be able to fund it, I'll buy the safer asset versus speculate in a risky fortune like gold that doesn't have a known outcome on a "American date, meanwhile, means the trend toward lower interest rates" is a great time to go into a mortgage or car loan, especially if you have a good credit rating, "Ely said.

But Americans should hope US interest rates never fall so low that they become negative, because negative prices will mean that the US economy has experienced serious problems, McBride said.

Borrowers may sound like fun, but the financial backdrop that would create such a scenario is not something we want, "he said.

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