60 Finance & economics The EconomistAugust 10th 2019
P
enguins on amelting icecap must
choose between budging up tighter
and taking the plunge. Institutional
investors such as pension funds and
insurers now face a similar unappealing
choice, with ever-fewer safe assets that
do not lose them money. According to an
index calculated by Bloomberg, a quarter
of the bonds issued by governments and
companies worldwide are now trading at
negative yields. Creditors holding $15trn-
worth of securities will make a loss if
they hold them to maturity (see chart).
Yields on many European govern-
ment bonds turned negative in the
mid-2010s as central banks engaged in
quantitative easing—colossal bond-
purchase programmes. By 2015, 40% of
the continent’s sovereign bonds offered
negative yields. But as economies perked
up, central banks changed course. By
November 2018 many European bonds
were back above sea level.
Now many have gone negative once
again. France’s ten-year bonds have been
flirting with negative yields for two
months; they went below zero three
weeks ago and stayed there. Ireland
followed on August 5th. Fiscally conser-
vative countries like Austria and the
Netherlands are well past that point.
Spain and Portugal may soon follow, says
Iain Stealey of JPMorgan Chase’s asset
management division. Germany’s entire
yield curve is already submerged.
As the trade war between America and
China intensifies, investors are taking
refuge in government bonds, pushingyields down. Meanwhile central banks,
fearing a global downturn, are cutting
interest rates. Mario Draghi, the presi-
dent of the European Central Bank, re-
cently hinted that it might ease policy
after the summer.
Central banks have failed to pep up
inflation, which has hovered well below
the 2% or so targeted by most ratesetters
in the rich world. Investors do not think
that central banks are on track to nudge
inflation up any time soon. Five-year
forward swaps, which track investors’
expectations on the matter, currently
predict inflation of 0.9% in Europe and
1.7% in America. This contributes to
depressed bond yields. Inflation erodes
the purchasing power of bonds’ future
cash flows, so the higher expectations of
future inflation are, the higher the yield
investors will demand, and vice versa.
For now American investors still have
somewhere to take refuge. Though yields
on ten-year American government bonds
have collapsed from their 3.25% peak last
November, they are still positive, at 1.71%.
Their 30-year equivalent yields 2.25%.
That is not much comfort for European
investors, who must pay around 3% to
hedge against dollar swings. If the Fed
eases faster than the ecb—and it has
more room to do so—the narrower gap
between American and European in-
terest rates would make hedging cheap-
er, though it would also mean there was
less point in buying American. Those
investors who already had, however,
would stand to gain.Under water
Bond yieldsAs yields turn negative, investors are having to pay for safetySea of redGlobal negative-yielding debt*
Market capitalisation, $trnGovernment-bond yields
By bond maturitySource: Bloomberg *Bloomberg Barclays IndexNovember 8th 2018 August 5th 2019Negative PositiveSwitzerlandJapanGermanyAustria
Finland
NetherlandsFranceIreland
BelgiumSpainPortugalSweden2345678910 20 30
Bond maturity,
yearsND
2018JFMAMJ JA
20190481216PublicPrivateservice, will not start before 2023. Covering
all of America’s 10,000 banks and other de-
pository institutions will take even longer.
In fact, America already has a real-time
payments system. The Clearing House
(tch), which is owned by 25 big banks, has
been running one since 2017. Between
them, says Steve Ledford of tch, the 16
banks that have so far joined the system
hold just over half of the accounts from
which payments can be made. tchis push-
ing for near ubiquity next year.
So why does the Fed want its own? First,
it is not convinced that tch’s system will
ever connect to all the country’s tiny banks.
Mr Ledford says that tch’s plan is to reach
smaller banks through the technology
companies that provide their computing
systems. Second, it fears that without com-
petition prices will be too high, quality too
low and innovation too slow. (The tchhas
promised not to discriminate against small
banks. It charges sending banks a flat 4.5
cents and receiving ones nothing.) Third, it
worries that a single service will create a
“single point of failure”. Doubling up will
make the whole system safer.
Big banks told the Fed, in a recent con-
sultation, not to bother. Even by consider-
ing its own system, it was delaying the
adoption of faster payments by more
banks. Randal Quarles, the Fed’s vice-chair
in charge of supervision, evidently agrees.
When the five governors on the Fed’s board
voted to back FedNow, he was the sole dis-
senter. He said he saw no “strong justifica-
tion for the Federal Reserve to...crowd out
innovation when viable private-sector al-
ternatives are available.”
Smaller banks, which for years have
been urging the Fed to build a system, are
delighted to be promised a choice. “The
private sector has a product but not the
reach,” says Cary Whaley of the Indepen-
dent Community Bankers of America, a
trade group. “The public sector has all the
reach but not yet the product.” (Most of
America’s 4,900 community banks have
assets of less than $1bn; the country’s big-
gest lenders weigh in at $2trn-plus.)
Aaron Klein of the Brookings Institu-
tion, a think-tank in Washington, argues
that the Fed has not gone far enough. Five
years is too long to get its new system up
and running, he says. Meanwhile, the
banks will still be pulling in overdraft fees.
He adds that the Fed should also have ob-
liged banks to let customers draw funds as
soon as they are deposited.
Last month Chris Van Hollen, a Demo-
cratic congressman, and Senator Elizabeth
Warren, one of the Democratic candidates
for the presidency in 2020, introduced a
bill that would amend the Expedited Funds
Availability Act of 1987 to force banks to do
just that. Time is money, goes the adage.
That’s even more true for struggling Ameri-
cans than for rich ones. 72