A growing number of people are beginning to think about what was once considered unthinkable – the prospect of zero, or even negative, interest rates in the world’s largest economy.
Alan Greenspan, the former chairman of the U.S. Federal Reserve, said last week it is only a matter of time before the sub-zero rates in Europe and Japan spread to the United States. Jamie Dimon, chief executive of JPMorgan Chase & Co., the biggest U.S. bank, told an investment conference on Tuesday his company is already analyzing how to deal with zero interest rates, on the remote chance they do arrive.
Then on Wednesday, U.S. President Donald Trump added his two (negative) cents, using his Twitter pulpit to urge the “boneheads” at the Federal Reserve to cut interest rates to “zero, or less.”
What should investors make of this chatter? If zero rates, or negative rates, do come to pass, the big winners would be bondholders, since the price of bonds goes up as rates fall.
The problem with this investing thesis is that it is by no means certain rates will fall much from here, no matter what Mr. Trump tweets.
While falling interest rates and recessionary fears were the overriding market themes in August, sentiment has shifted in September. It now appears that those betting on big rate cuts may have gotten a bit ahead of themselves.
Investors spent August rushing into the supposed haven of bonds because of spiralling fear about a slowing global economy and a potential U.S.-China trade war. One key indicator, the difference between yields on two-year and 10-year Treasury bonds, inverted its typical pattern late in the month. This is usually a reliable sign of a U.S. recession ahead.
But the latest economic news doesn’t suggest a recession is imminent.
The jobs markets in Canada and the United States continue to chug along, with unemployment levels hovering around half-century lows. Canadian home starts have bounced back; U.S. retail sales are holding up well. Factories around the world are struggling under the threat of a trade war, but the much larger services sector is still soldiering ahead, according to surveys of purchasing managers.
So much for apocalypse now. Bond yields have crept upward in recent days as investors emerge from their bunkers. North American stock-market indexes are holding near record highs. And the inversion in the spread between 10-year and two-year Treasuries has ended.
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