we've lived through low interest rates
and zero interest rates but investors
are not sure how comfortable they feel
about negative interest rates since the
talk is of banks charging people to look
after their money so our negative
interest rates going to fade and die or
get deeper and wider with me to discuss
this is Peter Westaway head of
investment strategy at the asset manager
Vanguard Peter remind us why do we have
negative interest rates at all well the
reason we have negative interest rates
is the central banks in in some
countries find it necessary to provide
additional policy stimulus they start by
cutting rates lower and lower
then they hit zero at that point they
can either start printing money by doing
quantitative easing or now they're
starting to move rates into negative
territory as well
what essential banks want us to do
central banks effectively are trying to
get us to spend more money because by
doing that we increase economic activity
in the economy and that pushes up
inflation which is what they want but is
it really the case that people are going
to be charged for these people to hold
their money in their banks and in undo
this is going to be charged for the
privileges of lending to governments
it's not quite the case not many banks
are yet charging negative deposit rates
and interestingly as a result of that
that means that probably the
pass-through from these negative
interest rates isn't getting through to
the borrowing rates so the effectiveness
of these negative rates in encouraging
people to spend more is probably a
little bit diluted okay so let's look at
our first chart which tells us how
prevalent negative interest rates are at
the moment this shows that around 30
percent of the the current issue issues
out there for sovereign developed market
bonds are are in negative territory now
that's a slight over estimate of how
much governments are actually getting
you a good deal because of course some
of those bonds were issued while rates
were still positive and they since moved
into negative territory in the secondary
market
but even so any government like
Germany's like Switzerland's going to
the market now to raise money is getting
a negative yield which means an effect
we're paying them for the privilege of
us giving them money
Peter why would investors want to invest
in a negative yield let's have a look at
your second shot yeah I mean I think the
really important
to remember here is why do you hold
bonds in your portfolio in the first
place and you're not holding bonds
because they give you fantastic returns
equities are in your portfolio for that
there's really two reasons one they
provide you a bit of a dampener
stability but second the most important
they provide diversification relative to
equities so what this chart shows you is
that if you take the worst quartile of
stock market performance over the last
14 years from 2001 to 2014
so when equities fell 6 percent this
tells you how different duration bonds
applied during those same periods and
what you see is that typically bonds
would go up to counteract it so
versification would still happen in
negative I don't think I mean I think a
couple of years ago we were beginning to
think that this diversification had run
out of Road but was still happening is
that as interest rates are falling and
falling where we're seeing that there's
almost no limit to it but the criticism
of negative interest rates is being
stepped up we've had Larry Fink of
Blackrock saying people are going to
have to save for longer is that correct
yeah I think that basic point is correct
but I think it's mixing up two slightly
different issues I think it's definitely
the case that because we're moving into
a low interest rate world investors are
going to have to save more to earn the
same income in their retirement as they
would have done a few years ago now
that's partly being affected by the low
interest rates and the negative interest
rates the central banks to implement
took at the moment but let's remember
why central banks are doing that they're
doing that in order to try and persuade
people to bring consumption forward from
the future to the present that's just a
standard thing that policymakers do
during a period when the economy's in a
big downturn but even when this downturn
is behind us it's still going to be the
case that returns are going to be lower
going forward and people are going to
have to send save more so poor old
investors are really the people that are
caught in the middle here between a bad
long-run outcome and policymaker actions
just very quickly Peter finally how long
we're going to have negative interest
rates I think we're going to probably
have them for the next your team Peter
Westaway thank you very much adieu thank
you