Negative Rates: Could it happen in the US?

An Updated Perspective from Invesco Fixed Income

Questions about the possibility of negative rates in the US arose back in March due to the quick and dramatic cut in interest rates by US Federal Reserve (Fed) from a target range of 1.50% -1.75% to a range of 0.00% - 0.25% in a two week time period, which then caused a subsequent sharp decline in US Treasury yields with US Treasury bills trading at negative yields. This was due to a classic supply/demand mismatch as investors flew to the safety of the front end of the Treasury curve and were met with insufficient Treasury supply to meet the demand. Since March, the Treasury and Federal Reserve (Fed) have taken certain measures to eliminate this mismatch:

  • The Treasury has increased the amount of bill issuance – US Treasury bills outstanding increased $1.4 trillion in March and April.
  • The Fed shifted its US Treasury purchases to include maturities other than US Treasury bills.

Both measures had their intended impact and Treasury bills now trade at positive yields across the maturity curve.

So why the renewed focus on negative rates? Unlike the events in March, the recent discussion around negative interest rate policy, or NIRP, has been driven by the Fed Funds Futures markets, where the December 2020 contract traded at a premium which implies a negative Fed Funds rate in December. This was the first time in history that a fed funds contract traded above 100.00.

Learn more about:

  • Negative rates as a Fed policy tool
  • Negative yielding securities in the short-term markets
  • Negative yielding money market funds

The Fed has indicated that it is highly unlikely that it would adopt negative interest rates as a policy tool and there are hurdles that it might need to overcome.

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