Investors Are Underestimating The Likelihood Of Negative Interest Rates, HSBC Notes

In a new report, HSBC analyst Steven Major addressed growing speculation that more global central banks, including the U.S. Federal Reserve, will opt for increasingly negative interest rates to combat deflation. According to Major, negative interest rates may also be a long-term solution to global debt issues as well.

The bond market isn’t anticipating much lower rates in the G4 within the next year. However, with five central banks now implementing negative rates and the U.S. Fed suggesting that it could turn to negative rates in extreme economic conditions, negative rates may no longer be considered a radical option.

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In fact, Major argues negative rates could kill two birds with one stone. In addition to combating deflation, they could also address one of the underlying causes of weak global growth: debt.

“NIRP helps deliver a negative real rate and, while normal coupons may be bound at zero, negative yields reduce debt over time by haircutting the bondholder at redemption,” he explained.

HSBC is predicting a year-end bund rate of 0.2 percent and a 10-year U.S. Treasury rate of 1.5 percent. So far this year, the ProShares Trust GGOV is up 2.5 percent in 2016 and the iShares Barclays 7-10 Year Trasry Bnd Fd IEF is up 4.6 percent.

Disclosure: The author holds no position in the stocks mentioned.