July 5 (Reuters) – If you are not prepared for negative
interest rates, you may have left it too late.
The European Central Bank on Thursday cut interest rates by
25 basis points to a record low 0.75 percent, and ECB chief
Mario Draghi acknowledged afterward that actual negative
interest rates are part of his arsenal.
Following suit shortly thereafter the Danish central bank
cuts its own rates by 25 basis points, a move that took a
secondary certificate of deposit rate to -0.20 percent. That’s
right, some Danish savers will now be paying their central bank
for the privilege of lending it money.
While many “real” interest rates – the rate taking into
account inflation – have been negative for some time, investors
are increasingly finding themselves faced with securities which,
however safe, are essentially pay-to-hold.
This is far from being unprecedented. Germany already allows
investors to bid negative yields for short-term government debt
at auctions. In January, the Treasury Borrowing Advisory
Committee, a group of Wall Street bond market participants,
urged the U.S. Treasury to do the same.