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​The “Global” Interest Rate is Now Negative

As time goes on and the world becomes more integrated through international trade and capital flows, the more central banks’ policy decision become contingent on what’s going on elsewhere. A study by King and Low (2014) found that the world’s interest rate is now negative in real terms, denoted by the top left graph in panel A below. This effectively means that central banks are now paying to lend at the overnight rate.

(Source: King and Low (2014), Hördahl et al (2016), US bond data, France bond data)

With the large-scale quantitative easing programs that have gone on to massively expand the money supply, yet insufficient lending demand to absorb this liquidity, interest rates have consistently dropped as a result.

As interest rates sink, investors are more incentivized to move over the risk curve out toward riskier assets, such as equities, real estate, and certain illiquid investments now that fixed income, savings, and other safe methods of capital appreciation have become so yield-poor by comparison. To find attractive yields in fixed income on a risk-adjusted basis, investors must look into emerging market economies that are relatively closed, with low capital-to-labor ratios (and hence more normal interest rates) and sound fiscal management.