Negative Rates: Zero is Just a Number

The German ten-year yields negative 0.56%, part of the world’s $15 trillion stock of negative-yielding debt, and that just sounds wrong. You give them your hard-earned money, and after a decade of waiting, you end up with… less than you started with. To anyone who grew up in the halcyon days of mostly positive interest rates, this just sounds weird. And yet, people do it: investors buy Bunds, JGBs, and Swiss government bonds despite negative yields.

Let’s talk about why.

Are Negative Rates Special?

Negative rates seem like they demand an explanation, but perhaps we’re all just slaves to our assumptions. There was a time when positive rates demanded an explanation. When the Czar told his secret police to write something really scurrilous, they plagiarized Dialogue in Hell Between Machiavelli and Montesquieu:

How are loans made? By the issue of bonds entailing on the Government the obligation to pay interest proportionate to the capital it has been paid. Thus, if a loan is at 5%, the State, after 20 years, has paid out a sum equal to the borrowed capital. When 40 years have expired it has paid double, after 60 years triple: yet it remains debtor for the entire capital sum.

In a certain cultural context, it makes perfect sense that interest rates were invented by someone bound for, or originally from, hell. Even today, I have friends — bright, educated people! — who can articulately argue that usury is a sin and should not be…