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Will we see negative interest rates in the US?

Interest rates in Europe on a variety of debt instruments actually reached negative levels this year, a bizarre economic environment with a lasting impact on the Eurozone’s economy. Essentially this means that investors in debt instruments are receiving less than their original investment over time.

The reason is simple: to encourage spending and ward off deflationary concerns. It’s a case of basic supply and demand – investors seeking a safe haven for their money invest in bonds. As demand grows, interest rates drop. Ideally, the rate would bottom out at zero, but with a heavy demand for safety, debt rates turned negative instead. Adding to the demand is the potential for currency appreciation. Even if the debt instrument returns a negative yield, the inherent currency could appreciate relative to the euro creating a gain overall for the investor.

The state of the US economy and bond yields

One of the biggest concerns for US investors is whether the atmosphere of negative yields will spill over into the domestic economy. The results for the first quarter in 2015 were disappointing, but inclement winter weather was partially blamed for the lackluster data. Economists believe the rest of the year should show a robust and growth oriented economy.

Yields on US debt instruments are still near all time lows, but the Federal Reserve has made several statements this year that indicate a rate hike is very likely to happen. While the European Central Bank (ECB) is prepared to begin a quantitative easing program intended to stimulate growth, the Fed officially ended its program late in 2014. It’s very unlikely that the US will actually see negative interest rates. Evidence suggests that US interest rates may currently be as low as they’re going to be before heading back up again later this year.

One major impact that negative rates would have in the US that makes it even more unlikely is the fact that consumers would essentially be paying banks just to hold their money. It’s a situation that the Fed wouldn’t let happen as consumers would simply hoard cash at home rather than make deposits. If that were to occur, it could create a liquidity crisis and halt lending activity.

As the US economy continues to gain strength, interest rates will rise as the demand for investment increases. For the US, negative yields won’t be a concern.