We see the recent introduction of negative interest rates by the ECB and Bank of Japan—though not without side effects that warrant vigilance—as net positives in current circumstances. [emphasis added]
— Christine Lagarde (April 4, 2016)
In the last couple of weeks there has been a tangible resurgence in investor interest on the topic of negative yielding debt. It is a subject that was widely discussed in 2015 and 2016 when government bond yields of some of the major economies (e.g., Switzerland, Sweden, Japan, and the EU) turned negative on a sustained basis, but then cooled as the Fed started its three-year tightening cycle. Yet today, it is back on investors' minds and is the topic of this week’s Economics Weekly, where we discuss why it has returned; the implications of negative yielding debt, with the same conclusion we reached several years ago, i.e., that costs associated with negative yielding debt are likely to be greater than the benefits; and that there are also alternative policy tools which should be used instead.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.