Do Negative Rates Make Sense?

Yesterday, we saw 3 month treasury bill rates go to a negative number.  This means you pay the government for them to hold your money.  We saw this a couple of months ago with 4-week bills and now we’re seeing it with 3-month bills.  Back in October, I suppose it kind of made sense because everyone was panicking.  We weren’t sure if the banks holding our money were going to give it back to us.  Well, not you and me, but I knew people that were scared of that.  But, now, there isn’t panic and the stock market’s been going up.  So, what’s up with the rates going negative?

Is it our government buying those bills pushing rates down so you and I will eventually use the money more productively than letting it earn negative rates?  Is it foreign governments that are buying 3-month bills because keeping it here is safer than them keeping it in their own country?  Probably both.

But, can negative or near zero rates last?  I think it can for a while and here’s why.  If the rest of the world is slowing at a faster pace than we are and at least we’re tackling the problems in front of us (even though many disagree with the tactics), then it makes sense our dollar is rising and money is flocking into our treasuries.  Think of it another way.  If your standard of living is rising because prices around you are falling, so what if you get 0% on your money.  If your purchasing power goes up by 5%, then you made 5% on your money without any interest.  So, this can continue for some time as long as we (the U.S.) looks like we’ll recover first. 

For me, If I’m going to try to earn some interest on my money, then #1, I don’t invest in securities with a negative interest rate.  Secondly, I’m looking for something over even .01%.  Corporate debt, municipal debt, & agency debt are the first place I look.  But, be careful because not all debt is the same.  There is some very risky debt out there that seems very attractive but can be dangerous.


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