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Negative U.S. Interest Rates? Don't Bet On It

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05/14/2020 | 11:44am EDT

By Sebastian Pellejero

Federal Reserve officials say the central bank isn't considering cutting interest rates below zero. One market still isn't ruling it out.

Federal-funds futures, which traders use to bet on central-bank policy, Thursday continued to show a chance of negative U.S. interest rates by April 2021, even after Fed Chairman Jerome Powell said Wednesday the central bank wasn't contemplating such a policy.

Wall Street analysts also generally aren't predicting negative interest rates. Many said the Fed has other options available to spur economic growth and inflation before resorting to cutting rates below zero -- a lingering remnant of post-financial crisis policies elsewhere in the world that some say hurts savers and the banking system.

While President Trump has tweeted in favor of negative interest rates, many are calling the Fed-funds moves a distortion caused by technical factors. Traders who bought short-dated U.S. Treasurys on the belief that interest rates could rise soon may have had to sell them in recent weeks as the government has sold more longer-dated debt, says Kathy Jones, chief fixed income strategist at Charles Schwab.

"Federal funds futures should reflect the slope in the short-end of the curve. You might have had some investors in those back months who had to reverse their positions," said Ms. Jones.

U.S. Treasurys rallied Thursday after data showed jobless claims fell slightly from the prior week. The yield on the benchmark 10-year Treasury note fell to 0.612% intraday, according to Tradeweb, from 0.648% at Wednesday's close. The 30-year yield declined to 1.284% from 1.340% Wednesday. Yields fall when bond prices rise.

Fed-funds futures also don't trade as often as other instruments that bet on interest-rate policy, such as eurodollar futures, which allow companies to lock in an interest rate on U.S. dollars held in foreign banks. Eurodollar futures show little indication of traders betting on negative interest rates.

Other analysts said the moves may be a sign of some traders hedging positions. UBS interest-rate strategists recently wrote that bank purchases could be driving shifts in fed-funds futures, as lenders look to insure against any slight possibility of negative interest rates.

Even the threat of negative rates should create some urgency in Washington to come up with additional economic stimulus, said Bob Michele, chief investment officer at JP Morgan Asset Management.

"What's worrisome to the market is that we've seen so many countries go to negative-yields," said Mr. Michele. "This crisis is so uncertain about the timeframe and what the effective policy response will be -- monetary, fiscal, and health care -- that at some point the U.S. may have to."

That said, he sees negative-rate policy as a last resort.

"For sure the Fed doesn't want to, and we hope we never get there, but it's certainly out in the market," said Mr. Michele.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
HOPE, INC. -1.34% 3695 End-of-day quote.14.75%
RISE, INC. -2.94% 33 End-of-day quote.10.00%
THE CHARLES SCHWAB CORPORATION 1.59% 34.43 Delayed Quote.-28.07%
UBS GROUP AG -0.81% 11.09 Delayed Quote.-8.55%
WORLD CO., LTD. -1.65% 1554 End-of-day quote.-42.25%
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