How Is This Massive Negative Real Interest Rate Possible? – Chart of the Day

Treasury Bond, 1979 (Wikimedia Commons)
  • Negative interest rates and negative real interest rates may stay with us for a long time.
  • Central banks and other big investors are buying government bonds at all prices.
  • This does not show a crisis, a collapse.
  • Avoid negative rates, fight inflation.

Detail of Old French Bond



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.

Below zero (blue line). German government bond yields 10 years, 5 years, 1-year maturities.
Below zero (blue line). German government bond yields 10 years, 5 years, 1-year maturities (

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.

Who Buys with Negative Interest Rates?

How is it possible? Are investors expecting deflation, that means, falling prices? Or is the world in a so bad crisis that the value of all other investments would collapse? Not necessarily. There are at least four more important reasons government securities are bought with negative returns.


National banks unlimited

The central banks are trying to revive the economy at all costs. So, they buy government bonds on the market at almost any price. Even if the return is negative, that means they spend more on it than they get back at maturity. (The higher the price of a bond, the lower the yield, and vice versa.) The purpose of the bond purchases is to pump fresh capital into the economy.


Active speculation

There are always investors who expect negative returns to sink even deeper. This causes increasing market prices, gains for speculators. The price can always go even higher – or the yield can always be even lower.


No other choice left

Such low rates can happen “when the market believes that there are no alternatives with sufficiently low risk”. (Wikipedia) Banks aren’t paying interests for large deposits either. Stocks and corporate bonds are too risky. Bank deposits have also risks, especially for large investors. Some large investors don’t have another choice.


Special reserve requirements

There are institutional investors, banks, insurance companies, pension funds that have to keep part of their capital and reserves in government bonds or bills. (Or in deposits of the central banks, but its interest rate is also negative.) By laws or by own rules. Even if it doesn’t produce any return or loss for them.

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.


I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

(Photos: Wikimedia Cover)

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