Investors are starting to worry about negative U.S. interest rates as China trade war damage rises


Goldman Sachs warned clients Sunday that it no longer expects a trade deal between the U.S. and China before the 2020 U.S. presidential election, it does predict more tariffs taking effect in September, and it lowered its U.S. fourth-quarter growth forecast to 1.8 percent accordingly. “Overall, we have increased our estimate of the growth impact of the trade war,” Goldman Sachs chief U.S. economist Jan Hatzius wrote. “Fears that the trade war will trigger a recession are growing.”

Slowing global growth and increased market turmoil have raised related concerns, too. Last week, Pimco economic adviser Joachim Fels said the escalating U.S.-China trade tensions could spark U.S. Treasuries slipping into negative territory, and “faster than many investors think.” Between $14 trillion and $15 trillion of government debt around the world already bears negative yields, where investors earn less than they invested — meaning, “essentially, that savers holding these bonds are paying the government to store their money,” The Wall Street Journal explains.

“So far, the U.S. has avoided that fate,” the Journal reports, but a steep slide in U.S. government bond yields has raised fears that negative yields might be coming soon, or even “what was once unthinkable:” negative interest rates, as central banks have experimented with in Japan and some European countries to juice the economy. The yield on the benchmark 10-year Treasury note fell as low as 1.6 percent last week, roiling the markets as “falling yields are typically taken as an ominous sign for the economy,” the Journal notes. Low yields on T-notes signal investors are flocking from stocks to bonds for safety, as yields drop when bond prices rise, as the Journal explained six months ago.

Until July 31, the U.S. Federal Reserve was steadily raising its benchmark interest rates, but if the Fed continues cutting rates “all the way back down to zero and restarts quantitative easing,” Pimco’s Fels wrote, “negative yields on U.S. Treasuries could swiftly change from theory to reality.”

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Source:: The Week – Business

      

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