Negative Interest Rates—A Phantom?

A boon for the U.S. government?  Investors were willing to pay the Treasury Department for the right to lend money to it.  This would seem strange except for the fact that TIPS will reimburse investors for increases in the Consumer Price Index.  Principal payments are adjusted for inflation.

The potential obligations to boost principal payments suggest that that yesterday’s win for the U.S. Treasury could be short-lived.  If inflation picks up materially, debt-servicing costs will also climb.

The Federal Reserve’s apparent inclination to pursue another round of quantitative easing, with large-scale purchases of Treasury securities, have spawned concerns that the longer-term risk facing financial markets could be higher inflation as opposed to deflation.  The difference between yields on regular 10-year Treasury notes and TIPS has suggested that investors’ expectation of future inflation has increased to around 1.8% in September from 1.1% in August.

Negative interest rates are another indication of the abundance of current liquidity.  The high demand for TIPS, gold, and commodities also suggests that there is a latent fear of future inflation that monetary authorities will need to monitor and safeguard against going forward.


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