Investing in Negative Interest Rates Is Guaranteed Losses

Bill Gross is critical of negative interest rates

“It’s really hard to make money when money doesn’t yield anything,” says Bill Gross. As critical as Gross is of central bankers and their policy measures, he also never fails to highlight the ills of negative interest rates. We’re increasingly seeing the developed world (EFA) (VEA) move toward negative interest rates. The key interest rate for the United States (SPY) is 0.50%. It’s 0% for the Eurozone (VGK), -0.10% for Japan (EWJ), and -0.75% for Switzerland.

In his April 2016 Investment Outlook, Gross talks about the Zeno paradox to make his point.

Investing in Negative Interest Rates Is Guaranteed Losses

Negative interest rates represent the Zeno paradox

Zeno was an ancient Greek who posed the following conundrum: Imagine a walker heading toward a finish line 10 yards away, but every step he takes is half the length of the step he took before. Even if he walked an infinite number of steps, he could never reach his destination. Bill Gross sees a similar challenge posed by the current negative rates regime.

While the twist in the Zeno paradox was that everything moves forward in integers and not in fractions, there seems to be no such solution or twist to the puzzles posed by present-day negative interest rates. However, investors continue to believe that negative interest rates will allow them to make money.

Negative interest rates imply guaranteed losses

Investing in negative interest rates is like locking in guaranteed losses. For instance, the German (EWG) five-year sovereign bonds, known as Bunds, currently yield -33 basis points. This produces a price of $101.50 for the bond. So an investor pays $101.50 for locking in $100 at maturity and no coupons during the life of the bond.

Next, let’s see whether central banks can spur inflation with negative interest rates.