Central Banks Moving Towards Negative Real Interest Rate
One of the serious consequences of the coronavirus epidemic can be that deeply negative real interest rates will remain with us for a long time. (Negative real interest rates are rates below inflation.) The nominal interest rate or bond yield may be also below zero. The US Federal Reserve recently announced an unlimited asset purchase program. And on Monday, the Bank of Japan joined. These measures can maintain low interests. The US and European central banks will meet this week. Investors expect further support and economic recovery from both institutions.
Central bank base rates and yields on most government bonds have been already negative or around zero in many countries in the last years. On the chart, you see the example of Germany. German government bond yields have been mostly negative since 2015. Also in Switzerland, Denmark, Japan, and several other countries, investors pay for the state to guard their money. Because of new measures, the negative interest rate may decrease further in Europe. The real interest rate can be even worse.
Avoid Damages by Inflation
How can you protect yourself against negative returns? Don’t buy such a treasury bond or bill. Since inflation is likely to happen, you would only lose some value of your money. About how to fight inflation, read our article: Eight Ways How Inflation Threatens Your Income and 13 Ways to Fight It. About why real interest rates will stay negative for a long time, we wrote here: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?
The bad news can be good news for some people. For example, if you are a borrower. A low-interest rate environment is good for you, with lower loan redemption. But you can only enjoy this if your income is at the right level.