Negative Rates May Shake Up Financial System

Falls in European interest rates into negative territory could profoundly affect the workings of the financial system and there is little chance of benchmark borrowing costs rising in the year ahead, top investment managers and strategists have warned.

Yields, which move inversely with prices, have this year dropped below zero on a rapidly expanding range of European governments’ bonds – and even some corporate bonds. The declines, which are driven by the European Central Bank’s “quantitative easing”, mean historically low borrowing costs. But senior finance experts interviewed by the Financial Times saw worrying side effects.

“This could be the makings of a completely new environment for global bond markets,” said Andrew Milligan, head of global strategy at Standard Life Investments, at the FT’s debt capital markets conference in London. “If it actually becomes permanent . . . There could be some very significant capital flows.”


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