When we published our flash note ‘From ZIRP to NIRP’ in November 2019, Central Banks were already adding stimulus to combat slowing economic activity. Many policy rates were close to or already at zero, and conversations about moving from ZIRP to NIRP (Zero/Negative Interest Rate Policies) were frequent. Today, Central Banks around the world have responded to COVID-19 with an extraordinary amount of monetary stimulus, and interest rates are even lower.
"The conversation about negative rates has reached fever pitch. We covered this last year. The conclusions about negative rates effectiveness and the risks are highly relevant, as is our view about the mature credit cycle, which has not changed this year. Enjoy."
Chief Investment Officer
Deltec Bank & Trust
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Deltec Bank & Trust Limited
We are re-publishing our note from this time because the conversations about negative rates have reached a fever pitch. We described in detail the futility of negative rates to stimulate borrowing and spending, growth and inflation. We highlighted the risks, particularly to banking. This retrospective also helps explain how we managed to be so well positioned moving into this crisis and helps re-iterate to our clients our investment roadmap.
The Effective Fed Funds rate in November 2019 was 1.55%. With China restructuring away from debt-fueled growth and already stretched corporate balance sheets globally, the credit channel was stuffed and the efficacy of Central Bank’s primary tool (changing interest rates) was limited.
At the time, their efforts had only slowed the rate of decline, not changed its direction. We expected growth to fade in 2020 so we anticipated further rate cuts and recommended owning both duration and Gold to benefit from the Central Bank monetisation.
All this year we have been happy owners of insured assets (e.g. Treasuries and investment grade corporate bonds) and assets that benefit from extraordinary money printing (e.g. Gold). The shutdown has exposed stretched corporate balance sheets forcing many companies to accept government lifelines. The Effective Fed Funds rate is now 0.05% and earlier this month the futures market implied a chance of negative rates by year-end. Although we don’t think the Fed will cross that line, market forces can take yields on US government securities negative in the near future regardless. Our views on the extended credit cycle have not changed, COVID-19 has accelerated trends that were already plain to see.
May 22, 2020