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A Look at the Oddity of Negative Interest Rates

By Motley Fool Staff – Nov 25, 2016 at 7:00PM

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On its face, negative interest rates should never exist -- the story behind this phenomenon is not quite that simple.

In this segment from Motley Fool Answers, the cast talks about a few "that will never happen" moments in the world of economics and finance that -- surprise! -- actually happened.

This time, they ponder the conditions that have led to an unthinkable inversion of financial norms -- when global benchmark rates went so low, for so long, that several nation's central banks actually set them below zero, meaning large financial institutions are actually paying for the privilege of having them hold large sums of money.

A transcript follows the video.

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This podcast was recorded on Nov. 1, 2016.

Alison Southwick: They said interest rates so low [that] some are even negative? That will never happen. That doesn't even make sense.

Robert Brokamp: It really doesn't make sense.

Southwick: It doesn't make sense.

Brokamp: In June, Bill Gross tweeted this. He said, "Global yields lowest in 500 years of recorded history. $10 trillion worth of negative-rate bonds. This is a supernova that will explode one day." And if you don't know, Bill Gross is a pioneer in the bond fund world. He's often known as the "bond king". He co-founded Pimco back in the early 1970's, and he's now with Janus. This is a guy who knows bonds.

But he's right. Interest rates are just crazy low, including negative interest rates. It's almost hard to conceive what that is. But for the most part, it's coming from central banks in developed countries like Japan, the ECB, Sweden. Basically you're saying, "I'm going to give you $1,000, and [you're] not going to [give me] $1,000 back." That's it. That's the investment. I'm basically paying you a storage fee to hold my cash.

Jim Royal: Sure.

Brokamp: But even U.S. interest rates. In July, the 10-year Treasury hit 1.4%. That's the lowest it's ever been. Business Insider had a great graphic that showed the rates on 10-year Treasuries back to when George Washington was president, and when you look at that, you really can appreciate that we're in unknown territory. This is a whole new world for bonds.

Southwick: What comes next? What is that supernova moment?

Brokamp: Well, we don't really know. We've never done this before. It's pretty crazy.

Royal: You've just got the world so awash in cash, right? Assets looking for returns. And the question is, how do you, in fact, cycle that through your economy? Instead of having this money searching for financial assets, how do you get it pushed through your economy? And it's a difficult thing to do.

Southwick: Yeah. And while we don't have negative interest rates here in the U.S., Janet Yellen has not taken it off the table. We'll see what happens.

Alison Southwick has no position in any stocks mentioned. Jim Royal has no position in any stocks mentioned. Robert Brokamp, CFP has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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