Could the Fed Actually Resort to Negative Interest Rates?

It’s a fact that global financial markets are interconnected.
The latest proof of that can be seen in the U.S. Treasurys market. Global central banks are selling Treasurys at the fastest pace since the 2008-2009 financial crisis.
Foreign official net sales of Treasury debt maturing in at least a year fell by $123 billion in the year ended July. That was the largest decline since record keeping began in 1978.
It’s no surprise as to where the selling pressure is coming from. The epicenter is the emerging world, led by China, Russia, Brazil and Saudi Arabia.
For now, at least, the selling is being offset by other buyers. These buyers are in search of a safe haven, worrying about the state of the global economy.

Emerging Market Woes Hitting Treasurys

Nevertheless, it is troubling that the once biggest buyers of U.S. debt are now sellers.
The reasons vary from country to country. With Saudi Arabia, it’s weak oil prices. With Russia, it’s sanctions and oil. With China, it’s the yuan devaluation and a slowing economy. And with Brazil, it’s recession, rapidly rising unemployment and a plunging currency.

Source: The Wall Street Journal

Bottom line: It all comes down to weakening economies and currencies.
The selling was led by China, which sold $120 billion of Treasurys in August alone supporting the yuan. The good news there is that, in September, China spent only $43 billion in supporting the yuan.
Another problem facing emerging economies is the Federal Reserve’s continued waffling on interest rates. Anticipation of high rates in the U.S. continues to pressure their currencies. The fear is that higher rates will attract capital to the U.S. and out of some developing markets.
It’s gotten to the point now where emerging-market central bankers are urging the Fed to just raise rates and end all the uncertainty and turmoil.
The central bank governor of Peru, Julio Velarge, told the Financial Times that most emerging markets wanted the Fed to raise rates “as soon as possible.” The senior deputy governor at Indonesia’s central bank, Mirza Adityaswara, told the FT, “The uncertainty has created the turmoil.”
So perhaps if the Fed got on with the business of raising rates, the turmoil would subside and the emerging world would once again start buying Treasurys.

NIRP and Treasurys

But raising rates may not end the upheaval in emerging-market economies.
That’s perhaps why the Fed has begun dropping subtle hints about negative interest rate policy (NIRP) for 2016. In fact, Federal Reserve Chairwoman Janet Yellen talked about negative interest rates as early as February 2010.
Negative interest rates are already in place in countries like Switzerland and Sweden. The Fed is well aware that large movements in the U.S. dollar seem to correlate with booms and busts in the developing world.
The theory behind a move to negative interest rates is this: Negative interest rates would weaken the dollar. Emerging market currencies would then regain their footing.
That could be a key component in the emerging economies stabilizing. Hopefully then, the growth story starts anew.
If that happens, it is thought that emerging countries would once again be eager buyers of U.S. Treasurys. That would ensure a strong bid in the Treasury marketplace, making the U.S. government and holders of Treasurys very happy.
Of course, NIRP may never happen in the U.S. But continuing turmoil in the emerging markets may push the Fed in that direction.
For short-term traders, the Federal Reserve’s interest rate indecision is a speculative investment opportunity. But if you’re a long-term investor, consider what the editors of High Yield Wealth consider to be “Forever Stocks” – the ultimate “set it and forget it” investments.