The only thing that’s certain about interest rates is uncertainty and divided opinions.
In Europe. Treasurers at a NeuGroup meeting sponsored by Unicredit last week heard a senior bank executive say he expects to see negative interest rates in Europe for the next two to three years. More than $17 trillion in debt now carries negative yields.
- This week, Unicredit’s CEO told a French TV channel that the bank is working on measures to transfer the European Central Bank’s negative rates “onto big companies or some big clients”—those with deposits of more than 100,000 euros.
In the US. At an earlier meeting of assistant treasurers, members held sharply different views about whether negative rates would cross the Atlantic. They also discussed how companies should prepare for the possibility.
It could happen here. One member whose company requires significant cash on its balance sheet was gloomy about the direction of fed funds, which have been cut twice by 0.25% in as many months, and now rest between 1.75% and 2%. The company also has a large bond portfolio, and treasury will be discussing the negative-rate issue with the board of directors later this year.
- The assistant treasurer said the Fed appears to have bowed to President Trump’s wish for lower rates—he recently called for rates at zero or below—if not to the extent the president wants.
- Given where fed funds stand today and the likelihood of an economic downturn prompting further cuts, the possibility has become less far-fetched. Former Fed Chair Alan Greenspan said in an August interview with Bloomberg that there is no barrier to US treasury yields falling below zero.
It can’t happen here. Most participants argued that fed funds would remain in positive territory, with one member mentioning two Fed studies that argue against negative rates. “Since the Fed’s own studies say don’t go there, they probably won’t,” he said.
- The San Francisco Fed concluded in a late August study that negative rates actually decreased rather than increased Japan’s immediate and medium-term inflation, with the caveat that its economic deterioration could have been steeper without them.
- However, another San Francisco Fed paper argued in February that negative rates could have mitigated the depth of the Great Recession and sped up economic recovery.
If it does. One option may be for companies to lower cash balances by making payments faster, members said, or when parking cash, go further out the yield curve and take on more credit risk. One member suggested returning more cash to shareholders, but then questioned whether they would want it.
- In the end, said the pessimist, companies concerned about the stability of the market may simply resign themselves to negative rates. “It’s negative, but it’s a known negative.”
