Early in my career I worked at an insurance company on the development of a new computerized investment administration and accounting system. One of the things we had to deal with was how to handle a new asset class: zero coupon bonds, or bonds that did not pay cash interest, but instead sold at a deep discount and matured at par value. In the current post-Credit Crisis environment, we have had a more unusual investment to deal with; bonds that “pay” negative interest rates!
Wells Fargo recently published their strategic view of how to invest in this current negative interest rate world (“Living in a Negative Interest-Rate World”, October 31, 2019). In it, they describe the global causes, potential for it to spread to the U.S. market, and investment implications.
As seen from the chart here, this situation has grown too big to ignore. Starting in late 2014, the volume of this debt has grown currently to over $17 trillion (though it has pulled back a bit from that top)! The causes came from global central banks easing monetary policy through quantitative measures to help avoid a recurrence into another deep recession. However, the jury is still out on whether this approach will ultimately prove successful!
The U.S. bond market currently has positive rates and does not seem positioned to enter that market realm. The authors quote some reasons, including: the U.S. has not shown a tendency toward deflation, the U.S. dollar’s dominance helps fend off negative interest rates in the U.S., and the Fed does not clearly have statutory authority to set negative interest rates.
The paper cites a few ways to invest for this market environment. Obviously, dividend-paying equities have been a prime example of an investment alternative. Also, bonds with some credit spread, preferred stocks, and emerging market debt can offer good value. However, as always, it is critical to remain well-diversified and invested to your strategic risk tolerance.