Thanks to the coronavirus-related financial crisis, we’ve broken more records in U.S. financial markets: Interest rates on some government securities have now dropped below zero, with one hitting a new low.
As of this morning, three-month Treasury bills on the secondary market were paying negative 0.036% — a record low. One-month Treasury bill rates also went negative.
This is the first time since 2015 that either rate has gone negative — meaning that instead of earning interest, investors will get back less money than they put into these government securities.
How can this happen? Because investors — especially the big, institutional kind — are so interested in safety and liquidity, they’ll even accept negative rates to achieve it.
Since you’ll probably be seeing more of this strange phenomenon, following is a brief explanation, starting with a video I originally did last September.
Why rates are so low in general
Low rates help the economy in several ways. For example:
- Both consumers and companies are more likely to spend if they can borrow money inexpensively. After all, the less interest we pay, the more money we have — and the more money we spend, the more the economy grows.
- Low rates cause a nation’s currency to weaken relative to that of other countries, which makes it cheaper for other countries to buy our stuff. This boosts exports, stimulating the economy.
- Low rates can help the stock market: Since businesses pay less interest, they’re more profitable. Also, when bank interest rates are terrible, investors seek out options with higher returns, like stocks.
So, although low rates aren’t good news for savers, they can get the economy moving. And that’s why we’re seeing such low rates today.
Understanding negative rates
I’ve been doing personal finance news for 30-plus years, and I’d never heard of negative rates until a few years ago.
Negative rates, as the term implies, are the mirror image of typical rates. Normally, when you put money in the bank, the bank pays you interest. But when rates turn negative, you’re literally paying the bank to hold your money.
We don’t have those kinds of negative rates. At least not yet. The negative rates that began in the Treasury market yesterday happened on the secondary market, the place where Treasuries are bought and sold after they’ve been issued.
Why would any investor accept negative rates? After all, certificates of deposit (CDs) and some savings accounts at the bank are paying close to 2%, and they’re insured. So, why don’t these big institutions just put their money in the bank?
Remember that bank deposits generally are only insured to $250,000 per depositor. Institutional investors are trying to protect hundreds of millions of dollars. The safest place on the planet to put money — the only truly risk-free investment — is U.S. Treasury securities. Since Uncle Sam can literally print money, he can’t default.
Could consumers see negative rates?
It’s possible negative rates could flow through to the consumer. In other words, we could be forced to pay to keep money in a savings account. Or, on the other side of the coin, we could theoretically get a mortgage that pays us instead of us paying the lender.
The latter has already happened in Scandinavia.
Last year, a Danish bank started offering mortgages with 0% and negative rates. From The Guardian:
“Jyske Bank, Denmark’s third largest, has begun offering borrowers a 10-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.”
With a negative-rate mortgage, instead of paying interest, you’d literally pay back less than you borrowed.
Pretty wild, isn’t it? But it’s not the norm. In countries with a negative-rate policy, it’s usually banks that are being charged to park their money in a central bank, not consumers. Nor, despite the example above, are consumers typically able to get paid to borrow.
What’s a saver to do?
For one, use certificates of deposit to lock in rates now, as we’ve suggested in multiple recent articles. It’s simple to do. Just visit this page of our Solutions Center to see the best CD rates today, as well as the best savings rates.
You can also consider other alternatives to traditional savings accounts. Learn more in articles like “How to Earn More Money on Your Savings.”
Bottom line? The coronavirus has turned this economy on its head. And it’s starting to look more likely it will do the same to savings rates.
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