The World Better Get Used to Negative Rates

Today, around $10 trillion of bonds are trading at negative yields, mainly in Europe and Japan. In the next recession, U.S. interest rates, too, may enter negative territory: Short-term rates are currently running around 2.5 percent, and cuts of between 3 percent and 5 percent are commonly needed to restart economic activity. In markets where rates are even lower or already negative, rates will need to go deeply into into the red.

Negative real rates refer to returns below inflation. Negative nominal yields involve a guaranteed loss of capital invested. In other words, if an investor places a deposit with a bank, she will receive at maturity an amount less than the original investment. In the case of bonds, negative yields mean that investors lose the difference between the price paid and the face value.