Australia’s interest rates just went negative. Here’s what that means

Australia’s government bond interest rates have gone negative for the first time ever. Here’s what that means for investors.
The post Australia’s interest rates just went negative. Here’s what that means appeared first on The Motley Fool Australia. –

A hand moves a building block from green arrow to red, indicating negative interest rates

At first glance (indeed, at multiple glances), the concept of a ‘negative interest rate’ seems absurd. Who would want to issue a loan that costs the creditor money? It’s like going to the bank for a home loan, and the bank offering to pay you interest for the privilege of taking its money.

Before you get to carried away with the notion that a bank is about to pay you to build a property empire, it isn’t quite that simple. But the principle is the same here.

Negative interest rates actually aren’t an entirely new phenomenon, although it has accelerated in 2020 due to the coronavirus-induced global recession. We saw negative rates introduced across many countries over the past 10 years, including in Japan, Germany, Switzerland and Denmark. Now, these don’t usually result in banks offering negative interest rates on mortgages. But they do involve the governments of these countries issuing government bonds with a negative interest rate attached.

And now, Australia has reportedly joined this club.

Negative rates for days

According to reporting in the Australian Financial Review (AFR), our Federal Government has just been paid to borrow money for the first time ever. The AFR does note that the government has issued inflation-linked bonds before that came with a negative interest rate. But this week marked the first time that ‘normal’ Australian government bonds have followed suit.

According to the report, the government recently offered a $1.5 billion traunch of 3-month bonds (expiring 26 March). This offer was apparently oversubscribed. One large investor who purchased “at least” $1 million worth did so at a negative interest rate of -0.01%.

What does this mean for the future?

According to a separate report from The Sydney Morning Herald (SMH) last year, ‘unconventional policies’ like negative interest rates are “designed to coerce the banks to behave differently [by] lending and generating economic activity rather than being penalised and losing money by leaving the funds with the central bank”.

It may seem ridiculous to ordinary investors like us for any creditor to accept a negative interest rate. However, the SMH points out that many institutions around the world, such as banks, insurers and some pension funds, have no choice. This is because “their prudential regimes require them to hold a significant proportion of risk-free and low-risk assets”.

This could actually be somewhat beneficial to ASX investors though. The SMH report states that:

There are winners from ultra-low or negative rates. The search for returns in a low-rate environment forces investors into higher-risk assets, such as shares or property… Those without the means, or who were risk-averse, have been punished by the low-rate, low-growth environment since 2008.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of June 30th

More reading

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Australia’s interest rates just went negative. Here’s what that means appeared first on The Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!